Consultative group for Zambia (Paris, April 9-11, 1990) : chairman's report of the proceedings

 67911 TABLE OF CONTENTS Page No. Chairman's Report ............................................. 1 Background ......................... ...................... 1 Opening Statement by the Chairman ................... 1 Progress Towards Economic Adjustment ................ 2 Statement by the Zambian Delegation .... ............. 2 Statement by the World Bank Delegation .... .......... 4 Statement by the IMF Delegation ..................... 5 Discussion of Zambia's Adjustment Program .... ....... 6 Program Implementation ................... ................ 10 Statement by the Government of Zambia on Technical Assistance .............................. 10 Statement by the Government of Zambia on the Social Action Program ............................. 11 Statement by the Bank on the Government's Social Action Program ............................. 11 Discussion of the Social Action Program .... ......... 12 Debt, Arrears, and Financing Requirements ................ 13 Statement by the Government of Zambia .... ........... 13 Statement by the Bank ............................... 13 Discussion on Debt, Arrears and Financing Requirements ...................................... 14 Other Business ....... ................ .................... 15 Closing Remarks by the Zambian Delegation ................ 15 Closing Statement by the Chairman ............. ........... 16 Annex I Agenda Annex II Final List of Participants Annex III Chairman's Opening Statement - Mr. Sven Sandstrom, World Bank Delegation Annex IV Message of Goodwill from H. E. The President of Zambia Annex V Opening Statement by the Minister of Finance and National Commission for Development Planning, Hon. G. G. Chigaga, Head of Delegation of Zambia Annex VI Statement by the World Bank on Zambia's Adjustment Program and Economic Prospects - Mr. George Gebhart, World Bank Delegation Annex VII Statement by the IMF Delegation - Ms. Burke Dillon  CONSULTATIVEGROUP FOR ZAMBIA, PARIS, APRIL 9-11, 1990 Chairman'sReport of the Proceedings Background 1. A meeting of the ConsultativeGroup for Zambia was convened at the World Bank's European Office in Paris, from April 9-11, 1990, under the Chairmanshipof Mr. Sven Sandstrom,Director, SouthernAfrica Department, the World Bank. 2. The meeting was attended by delegationsfrom: Canada, Denmark, Finland, France, the Federal Republic of Germany, Ireland, Italy, Japan, the Netherlands,Norway, Sweden, Switzerland, the United Kingdom, the United States, the African Development Bank, the Commission of the European Communities, the European InvestmentBank, the International Monetary Fund, the OPEC Fund for International Development,the United Nations Children's Fund, and the United Nations Development Program. Observers from the Arab Bank for Economic Development in Africa, the Food and Agricultural Organization,and the Organizationfor Economic Cooperationand Development also attended the meeting. 3. The following documentswere distributedfor the meeting: Government of Zambia (i) Progress Report on the Implementation Economic Measures. of (ii) The Public InvestmentProgram for 1990-1993. (iii) The Social Action Program. The World Bank (i) Report to the ConsultativeGroup for Zambia on Progress Towards EconomicAdjustment. (ii) Zambia Transport Sector Issues: Summary and Recommendations. Opening Statement by the Chairman 4. In welcoming the representatives the Governmentof Zambia and of the donor community,Mr. Sandstromnoted that the meeting was taking place at a particularlycritical juncture in Zambia's adjustmentprocess. After a prolonged period of economic decline marked by several unsustained attempts at economic reform, Zambia had now embarked on the path of economic reform. But this effort was made particularlydifficultby two factors. On the one hand, the capacity of the Government to carry out the reforms had been reduced by the cumulativedeteriorationof physical infrastructureand the shrinkingdomestic resourcebase, while on the external front Zambia's access to external financial resourceshad been seriously constrained by the huge debt overhang and inappropriateeconomic policies. How to relieve these constraintsin the short and medium term, while respondingto Zambia's long-term growth needs, the Chairman stressed, was the key question before the meeting. He noted that a sound basis for adjustmenthad been laid in the Policy Framework Paper (PFP), as well as the Fund-monitoredannual program for 1990, on which the Governmenthad recently embarked. Although these initial efforts were beginning to bear fruit in restoring macro balance, it was important for the adjustment effort to go beyond the stabilizationstage, in order to bring about the required longer-term restructuringand growth of the economy. Prospects for this structural transformation depended crucially on adequate external financing. 5. Efforts to mobilize the necessary external resources in support of Zambia's adjustmentprogram were, however, complicatedby the difficult question of how to resolve Zambia'shuge debt and arrears, particularlyto the two Bretton Woods institutions. Various suggestionson how to deal with this problem such as the "accumulation rights"within the Fund, of were under consideration,the Chairman continued. However, the adoptionof any such proposals would require Bank and Fund shareholdersto reconcile application of such solutions to the case of Zambia with the existing rules and procedures on access to and use of resources from these institutions by other borrowers. In this context, it was particularlyimportant,the Chairman stressed, to resolve the question of the simultaneous versus sequentialclearance of arrears to the Bank and the Fund. The Chairman informed the meeting that these difficult questions had not yet been resolved, and would most likely be taken up at the forthcomingmeeting of the Interim Committee in early May. 6. But while financing issues were of immediate and central concern to the meeting, the Chairman hoped that participantswould give serious attention to the substance and process of reform in Zambia. The content, pace, and institutionalcapacity for implementingthe reform program, were critical elements to ensuring the success of Zambia's adjustmentprogram. Equally importantwas the need to consider the Government'sSocial Action Program in order to ensure that the vulnerable groups in society participated in and benefitted from the adjustmentprogram. Only then could sustainability of reform be assured. Progress Towards Economic Adiustment Statement by the Zambian Delegation 7. Before making his opening remarks,the head of the Zambian delegation, Hon. Gibson G. Chigaga, the Minister of Finance and National Commission for DevelopmentPlanning, read out a message of goodwill to the meeting from H.E. the President of the Republic of Zambia in which the President reiteratedthe commitment of the Zambian Governmentto the reform program. In his opening statement,the Minister pointed out that in contrast to previous attempts at economic reform, the present program of adjustment in Zambia took as its startingpoint the need to integrate and protect the vulnerable groups from the adverse effects of adjustment. In this way, he noted, the risk of reversing the program of reform on account of adverse reactions from the public would be considerablyreduced. 8. In discussing the progress achieved in policy reforms since the last informalmeeting of donors on Zambia in July last year, the Minister outlined some of the measures the Governmenthad taken within the framework of agreed policies. These included the decontrol of all prices except on maize meal; significantreductionsin subsidies;progressive adjustmentsto the exchange rate and monetary and fiscal measures to reduce inflation. Although it was too early for many of these measures to have had an impact on the performance of the economy, there were indications, he noted, that the measures were beginning to have the desired stabilization effects. After a rapid rise in inflation followingprice decontrol in June 1989 (the rate of inflation rose to 122.5 percent by December 1989, compared to 62.1 percent at the end of 1988); there were indicationsthat inflationwas now slowing down. Similarly, the rate of growth in money supply had decelerated from 75 percent in June 1989 to 49 percent in February 1990, and it was expected that the rate would fall further to 30 percent for 1990 as a whole. 9. In spite of these encouragingtrends, economic performance remained weak during 1989. GDP was estimated to have grown by only 0.1 percent compared to 6.3 percent in the previous year. This poor economic performancewas largely attributableto extensive damage at the Kafue Gorge Power Plant which seriouslyaffected the performanceof the manufacturing sector; while agriculturaloutput was adverselyaffected by the heavy rains and floods. The mainstay of the Zambian economy, the mining sector, performed satisfactorily, registeringa rate of growth of 9.5 percent in 1989, compared to a decline of 12.9 percent in 1988. Transport bottlenecks,however, continued to affect adversely the performance of this sector; and overall, the prospects for improved economic performance in 1990 were not promising, the Minister observed. 10. In the light of these circumstances, the Governmentof Zambia recognized the need for additionalpolicy measures to restructureand diversify the economy, the Minister continued. In particular, there was need to take further actions to stimulate agricultural performanceand non- traditionalexports. Such actions would include the creation of an Export Revolving Fund, streamliningof export licensingprocedures; improvements in marketing and distributionof agriculturalcommoditiesand inputs, as well as enhanced incentives to encourage domestic and foreign investment. Tariff reform, reduction of industrialprotection, revisionof the investmentcode, and review of the operationsof major parastatals, would be key actions in this regard. 11. On the important question of Zambia'sneeds for balance of payments and investment support,the Minister appealed to the Group for immediate support. The Governmentof Zambia had prepared a detailed Public Investment Program (PIP), for the period 1990-1993,in which the priorities of various projects had been indicated. Of special importanceto the success of the reform program was the adequate funding of the Social Action Program, designed to cushion the impact of the adjustmentprocess on the vulnerable groups. Actions to strengthenthe Government'simplementation and management capacitywere also critical to the success of the program. In concluding his remarks, the Minister noted that it was beyond the capacity of Zambia to service its debt, even on the most optimistic  - 4 - assumptions on performance of the economy, and in this regard, he looked forward to the suggestions of the Group on how best to deal with this difficult problem. Statement by the World Bank Delegation 12. Mr. George Gebhart, on behalf of the Bank, reviewed the background to Zambia's present reform program. While the 1980s had been characterizedby economic decline, it was important that the present reform effort establish the basis for economic recovery as Zambia enters the 1990s. Although the present adjustmentprogram marked a significant departure from past policies, it was nonetheless doable, he noted. The content of reform had been considerablystrengthenedsince the conclusion of the PFP in September last year; while arrangementsto strengthenthe implementationcapacity of the Governmentwere underway. All in all, the pace and direction of reform appeared appropriate. 13. However, in order to consolidateprogress achieved on the macroeconomicfront, it was important to address the policy and structural bottlenecks to production and diversification the economy. In this of regard, further sectoral policieswere essential. In agriculture,it was important to reinforce the impact of pricing policies by further liberalizationof marketing and distributionof agriculturalcommodities, particularlymaize and fertilizers. Involvementof private sector truckers in these activitieswould result in significantcost savings,and hence contribute to reduction of subsidies in this sector. In addition, it would be desirable if agriculturalsupport services such as credit, researchand extension were to be more directly targeted to the small-scaleholders in order to raise the productivityand hence incomes of this group. Lastly, the development of the country's agriculturalexports would require removal of the remaining restrictionson them. The Bank would address these and other outstanding issues in the agriculturalsector such as land tenure in a forthcoming agriculturalsector review. 14. As regards industry, the adjustmentmeasures already taken by Zambian authorities should considerablyimprove allocationof resourcesin the sector while reducing the import dependenceand intensity of production. However, the key to improved industrialperformancewas increased competition through private participationand investmentin the sector, he stressed. This required the creation of an enabling environment in which private entrepreneurswould be able to go about their business with minimal controls and regulationsfrom the Government. Identifyingand pursuing such actions should be at the top of the policy agenda in this sector. 15. Mr. Gebhart further noted that at the core of the issue of improved industrial performance in Zambia was the whole question of the role and performance of the parastatal sector. In recognitionof this role, the Government of Zambia had initiateda review of the parastatal sector which would simultaneously focus on the relationship between ZIMCO and its subsidiariesas well as in-depthreviews of financialand economic viability of selected poorly performing subsidiaries. The Bank would assist the Government of Zambia in this exercise. In the mining sector,  - 5 - the uncertain prospects both with regard to copper prices and mineral reserves, demanded that measures for cost controls and the orderly phase down of the sector, which were currently being implementedby the ZCCM and the Government, be sustained. He noted that Zambia's deteriorated transport sector was exacting a heavy cost on the economy. Neglect of maintenance and lack of spare parts had led to inefficientand costly transport services, and it was important to restore balance in the transport systems in order to permit more efficient economic activities. In this regard, priorities for investmentand expenditure in the sector within the Public InvestmentProgram (PIP)would be directed at rehabilitationand maintenance activities,provision of spare parts, acquisition of a limited number of locomotivesas well as other transport vehicles. Improvementsin planning and financial controls, as well as training of technical personnel,would also be required in order to remove the inefficienciesin the sector. 16. With regard to public expenditures,the Governmenthad initiated reforms under the 1990 budget. Of particular importancewas the decision by the Government to increase significantlythe allocationsfor recurrent departmentalcharges for the social sectors,particularlyeducation and health. It was the intention of the Government,Mr. Gebhart noted, to maintain these increases in subsequentbudgetary allocations. The PIP for 1990-1993,which was a first "cut" at expenditurerestructuringalong the lines of the criteria set out in the 1987 Public ExpenditureReview, constituted the first step in the Government'songoing exercise in expenditure restructuring. While this exercisewould be broadened and deepened in the following years, it was the expectationof the Government that investment activitieswould reflect the prioritiesoutlined in the PIP. Statement of the IMF Delegation 17. In her statement,the IMF representative, Ms. Burke Dillon, noted that Zambia had made significantprogress in its adjustmentprogram since the last informalmeeting of donors on Zambia almost nine months ago. Not only had the Governmentperseveredwith the adjustment strategy set out in the PFP, but in many ways the Governmenthad taken stronger actions up front and set itself more ambitious targets for the 1990 program. In particular, the authoritieshad moved more rapidly on reduction of subsidies,adjustment of the exchange rate, and trade liberalization. They had also set more ambitious targets for inflation,the budget deficit, and interest rates, while work on designing the parastataland tariff reforms had commenced. As a result of an active monetary policy, she noted, the rate of growth of money supply had been reduced from 75 percent through June 1989, to 60 percent through December 1989 and down to 49 percent by February 1990. Because of this progress, the Governmenthad now set itself the goal of 40 percent for the rate of inflation in 1990 compared to the PFP target of 55 percent. But although the budget deficit was reduced significantlyin 1989 compared to 1988, fiscal performanceremained somewhat weak and would require careful management. Two recent developments in the real economy gave cause for concern. Firstly, as a result of continuingproblems in the transport sector, the volume of copper  -6 - shipmentswas running significantly below program level; and secondly, owing to the erratic rains in the 1990 crop season, the maize output was likely to be sharply down compared to 1989. 18. The most important development in policy reform in Zambia since the informalmeeting of donors in July last year was, she noted, the introductionby the Zambian authoritiesof a dual exchange rate system, with a second window exchange rate designed to provide a strong incentive to non-traditionalexporters and to encouragemore efficient use of foreign exchange for imports, including donor funds. In opening the second window, the Bank of Zambia had been rightly cautious in establishinga limited initial list of items under the Open General License (OGL) scheme; however, the intent was to move fairly rapidly to a more general OGL system and in this regard, the authoritieshad recently added more goods to the OGL list. Fund and Bank staff attached importanceto the mobilizationof donor support for second window operations;but this would require streamlining of donor procurement and disbursementprocedures. Regarding the official exchange rate in window one, the authoritieswere moving that rate in a manner consistentwith convergenceof the two rates in advance of the mid- 1992 target date envisaged in the PFP. Taking all these into account, the Board of the Fund consideredthat except for the absence of adequate financing on appropriate terms, Zambia'spolicies and objectivesunder the 1990 annual program met the standards of upper tranche arrangementsand Fund-monitoredprograms. The Zambian adjustment effort was now enteringa new and challenging phase, calling for determinedand closely monitored implementation. 19. On the question of arrears to the Fund, Ms. Dillon noted that the "accumulationof rights" approachhad been generally endorsedby the Fund's board, but the modalities remained to be determined,she stressed. Although there was broad agreement on the need for a Support Group, it was expected that the ConsultativeGroup would serve as the main vehicle for mobilizing external assistance for Zambia. Pending the formation of a Support Group, a Working Party of Fund Directorshad met on several occasions to discuss Zambia's financing requirements which were estimated at about $700 million for 1990. In conclusion,she noted that Zambia's ambitious adjustmentprogram deserved the timely and adequate support of the internationalcommunity. Discussion of Zambia's Adjustment Program 20. In discussing Zambia's ongoing economic reform program, all delegations commended the Government of Zambia on the difficult decisions it had taken so far to restore macroeconomicbalance. The participants noted that while it was importantto sustain the stabilizationgains, it was necessary to take a longer-termperspective and begin to lay the basis for the more difficult task of restructuring and diversifyingthe economy. The participants stressed that the present reform program needed to be sustained over a long period for the reforms to bear the necessary fruits in the form of restored economic growth. While broadly welcoming the content and direction of the Government'sreform program, the participants were unanimous in their view that the present adjustmentprogram, if fully implemented,and appropriatelybacked with sufficientfinancial resources, constituted a fair chance, perhaps the last chance, for Zambia to embark on long-term self-sustaininggrowth. For it to succeed,however, it required a fundamentalpolicy reorientationon the part of the Zambian authorities. 21. In particular, all delegateswere concerned about four aspects of the program, namely: (a) the role of parastatalsand, as a corollary, the need for a more effective role by the private sector in the economic life of the country; (b) diversification and restructuringthe economy; (c) the size and structure of the public investmentprogram, and (d) measures to strengthen the Government'sprogram implementation capacity. (a) Role of Parastatal and the Private Sector 22. Participantsexpressed the view that in order to bring about the required structuraltransformationof the Zambian economy, it was essential to curtail and reduce the role and size of the present parastatal sector in Zambia. The parastatal sector continued to be a drain on the country's scarce resources,both financial and human. A smaller and more efficient public sector would be cheaper to sustain, and could contributemore effectively through higher productivityand domestic resourcemobilization. There was a need, therefore,to take a critical look at the economic and financial viability of public enterpriseswith a view to closing down poorly performing entities. Such a review of the parastatal sector should also provide scope for privatizationinitiativesin Zambia. Moreover, it was essential to follow up price decontrolmeasures with actions to liberalizemarketing and distributionsystems in order to enhance efficiency and competition in the productive sectors. It was clear, most participantsobserved, that if the Government'sdiversification efforts were to succeed, the private sector, both domestic and foreign,would have to play a greater role in the Zambian economy. To effect this change, the Government needed to change its attitudes towards the private sector, particularly the small scale and the informal sectors. Actions to create an enabling environment and to enhance incentivesfor investmentwould be required, they stressed. 23. Several delegationsalso expressed the view that the role of the Zambia ConsolidatedCopper Mines (ZCCM), the largest parastataland economic entity in the country, needed to be reviewed in the light of Zambia's short and medium-term growth prospects. In particular,ZCCM's use of foreign exchange, and its contributionto the budget needed to be reviewed. Similarly,there was need for a critical review of its operation of non-copper and non-mining subsidiariesand activities. But above all, ZCCM would have to share in the burden of adjustmentby intensifyingits cost-cutting and phasing down plans, in order to prepare itself for the leaner years ahead when the economics of copper productionwould be radically altered by the prospective decline in ores and structuraldecay of the industry. 24. In reacting to these concerns, Hon. Chigaga assured the participantsthat the Governmentof Zambia had already taken decisions to resume the review of parastatalswhich had been initiatedunder a World Bank project in 1986. It was the intentionof the Government to extend this review to the portfolio of Zambia Industrialand Mining Corporation  - 8 - (ZIMCO) including ZCCM, and in this regard, terms of reference for such a study had already been agreed with the Bank. In addition, the actions which the Governmenthad taken on price decontrol and other macroeconomic measures -- the adjustmentof the exchange rate, interestrates and the removal of subsidies,and the proposed tariff review, should considerably enhance competitivenessin the sector. Moreover, he added, the Government had abolished duty exemptions for parastatalsand had taken actions to limit their financial dependence on the budget. 25. With regard to the particular issue of the role of the private sector, the Minister reiteratedthe Government'spolicy of attracting foreign investors through joint ventures. Indeed, the Governmentwas in the process of reviewing the InvestmentCode to make it more attractiveto investors,both local and foreign. The Government intended to establish a one-stopwindow to facilitatemore rapid approvals of investmentproposals and was consideringestablishinga Tax Free ManufacturingZone. The actions to adjust the exchange rate, raise interest rates, as well as more rapid approval of investments should also enhance the incentivesto the private sector. The Governmentwas also concerned,he added, to enhance the incentives to local small-scaleenterprises,and to this end, it had established a Credit Guarantee Scheme at the Bank of Zambia. However,more still remained to be done to create an enablingenvironment for the informal sector and, in this regard, the Governmentwas seeking assistance from donors to finance a project targeted at this particular sector. Finally, a representativeof the Governmentof Zambia stressed that ZCCM was carrying out its own review of its subsidiaryactivities,and would, in the meantime, embark on the recommendedcost-cuttingand phase-downplan to assure the long-term viability of the company. (b) Diversificationof the Economy 26. The economic prospects of Zambia are overshadowedby the prospectivemedium and long term decline of the copper industry. It was imperative,therefore, that actions to diversify and restructurethe economy were taken on a timely basis. However,while welcoming the Government'sdiversificationstrategy, several participantsthought that its present strategy relied excessively,and perhaps unrealistically,on the growth of non-traditionalexports. The restructuringof an economywas a slow process, and the supply responsewas likely to be slow in Zambia where there were still many impedimentsto agriculturalproductivity. Efforts at restructuringthe economy should, therefore,focus on reducing the import dependenceand intensity in production in Zambia by encouraging import substitutionactivitiesas well. Moreover, such a strategywould reinforce the Government'sefforts at promoting private sector investments and the development of the informal sector. It was essential,therefore, to remove the remaining constraintsto informal activitiesin addition to streamliningand liberalizingexport activities. 27. In response to these concerns,Hon. Chigaga concurredwith the sentiments of the participantsand assured the delegates that export licensing activitieswill be further liberalized, while regulations governing establishment of local enterpriseswill also be reviewedand simplified.  - 9 - (c) The Public InvestmentProgram (PIP) 28. Participants generallywelcomed the Government'sPIP, but expressed concern on the followingaspects: (a) its size relativeto available resources; (b) the balance between capital and recurrent expenditures; (c the balance between public and private sector activities; (d) priorities within the sectoralprograms, particularlythe emphasis on rehabilitationof ongoing activitiesversus new projects; and (e) the capacity of the Governmentof Zambia to implement the program effectively. Several participants felt that at K 49,442.5million the program was perhaps too large compared to the resources that were likely to be available to Zambia. Moreover, with a total foreign exchange requirement of $1,309.9 million (65 percent of the total cost of the program), the program had an excessivelyhigh foreign exchange content. In addition, the PIP did not indicate the recurrent expenditurerequirementsfor the investmentprogram. It was important,participantsfelt, to indicate the correspondingrecurrent resource requirements necessary to sustain the various projects in the PIP. In addition, the balance between public and private sector investmentactivitiesshowed that the parastatalswould remain the dominant investmentvehicle in Zambia, in contrast to the perceived need of restructuringthe economy by promoting more private sector activity. A better balance between private and public investment shares in the PIP was necessary in order to reduce the crowding out effect of the PIP on economic activity in the country. While many participants welcomed the special emphasis on the social action program contained in the PIP, several donors noted that the share of investmentallocated to the social sectors (i.e. education and health), remained inadequate. The focus of the PIP on rehabilitationof existingprojects was also likely to perpetuate unviable or inappropriateactivitiesand outmoded investment patterns. The need to restructurethe economy called for new investments to reflect present needs and growth prospects. Moreover, there was need to move away from large to small-scaleinvestmentsin order to reduce the import content of the PIP, while encouragingthe informal sector. The comprehensivenessand ambitious scope of the PIP would also, in the view of the participants,sorely test the implementation capacity of the Government of Zambia. 29. With regard to the questions raised on the PIP, Mr. Gebhart of the World Bank said that the PIP had been based on a careful review of the resources likely to be available to Zambia and the estimated cost of the program up to 1993 was consistentwith the financing assumptionspresented to the group. Moreover, the balance between the public and private sector would be progressivelyenhanced. The PIP was also flexible enough to accommodate changes in priorities to enable the Governmentand donors to respond to new investment demands. In preparing the PIP, the Government had also sought to eliminate or down-play several ongoing projects such as Area Development Programs in the Ministry of Agriculture,which had been identified as of lower priority or as no longer viable. However, in carrying out this exercise, it would be necessary to proceed carefully and review the implicationsof abandoningvarious projects on the viability of other related and ongoing governmentactivities, as such decisions to cancel projects would in many cases also involve changes in financing arrangementswhich would have to be renegotiated with donors. However,  - 10 - such review would not preclude new investmentprojects, and there was still scope in the PIP for the inclusion of new projects consistentwith the broad recovery strategy. Finally, it should be noted that the PIP was not a full blown public expenditurereview exercise. Rather, the PIP was a first attempt at review of governmentexpenditures, based largely on the recommendationsof the last World Bank Public Expenditure Review of 1987. The process of preparing and updating the PIP was, moreover, an iterative one, and the present PIP constitutedthe first phase of identifyingthe critical elements of public investmentsin pursuit of the adjustment strategy. It was expected that the Governmentwould systematically review the recurrent expenditure implications of the PIP in the process of preparing the annual expenditureand investmentprogram of the Government budget. These views were endorsed by the representative the Government of of Zambia, who assured the participantsthat the PIP would be reviewed annually in order to reflect performance and experiencein program implementation. Program Implementation (a) Statement by the Government of Zambia on Technical Assistance 30. The implementation capacity of the Government had been a source of concern to both the Government itself and the donors. It was important that actions were taken to strengthenthe capacityof the Government to implement the reform measures and to manage the adjustmentprocess effectively. This was all the more important in view of the complexityand comprehensivenessof the current reform effort. The Governmentof Zambia outlined the measures that it had taken or intended to take to strengthen program implementationcapacity. So far, a National EconomicMonitoring and ImplementationCommittee to monitor the implementation the of adjustment program had been established. However, this committee required the back-up of additionalexperts in the core areas of economicmanagement. These were: (a) two experts on statisticsand national accounts; (b) MacroeconomicManagement Advisor; (c) Planning and Budgeting Advisor; (d) External Aid CoordinationAdvisor; and (e) Debt Management Specialist. The specific terms of reference for each of these experts were outlined in Chapter 9 of the PIP. The estimated cost of technical assistance for a period of three years would range from $1.8 million to $2.7 million. The experts would work closely and provide advice to selected Zambian key personnel as well as undertake trainingactivities,and he hoped that donors would respond favorably to the Government'splea for assistancein financing and providing the required experts. 31. With regard to the particularproblem of ensuring the effective implementationof the PIP, participantsstressed the need for effective donor coordination. It was especiallyimportant that donors reviewed their own ongoing activitiesto ensure that these were consistentwith the Government'spriorities as reflected in the PIP. Besides the provision of technical assistance for program implementation, there was need to undertake special programs for human resource development,in order to internalize the reform process and thus ensure sustainability the of program. Actions to counter the increasingbrain drain from Zambia were  - 11 - also important in this regard. Actions along these lines would also positively contribute to the capacity of the Government to implement the Social Action Program. (b) Statement by the Government of Zambia on the Social Action ProRram 32. As stressed in the Minister's opening remarks, Zambia placed a great deal of importance on ensuring that the socially vulnerable groups participated in and benefited from the adjustment process. The capacity of the Government to maintain adequate levels of expenditures on social services had been reduced as a result of economic decline in the last 15 years. Consequently, social indicators for health, education and nutrition had deteriorated; and it was imperative that these trends were reversed in order to alleviate the burden of adjustment on the already marginalized social groups such as the unemployed youth, women and children. The Government had therefore prepared a Social Action Program as an integral part of its adjustment strategy whose main focus would be the reduction of poverty through employment creation and income generating activities. The elements of the program were outlined more comprehensively in the Government's document on the Social Action Program which had been distributed to the meeting. A series of projects in health, nutrition, education, water and sanitation, women in development, small-scale enterprise development, etc., amounting to a total cost of $314.5 million for the period 1990-1993 had been identified; and the Government hoped that donors would express their support to this program by funding various elements of this program. (c) Statement by the Bank on the Government's Social Action Program 33. Mr. David de Ferranti of the World Bank noted that the Social Action Program was a timely and important initiative, essential for helping to protect the vulnerable groups during the transition to economic recovery. The program, which was both action oriented and multisectoral in its scope, had been fully incorporated and well integrated into the recovery strategy. The proposed projects in health, education, water, sanitation, agriculture, roads, market places, etc were all contained in the PIP. There was a strong focus on helping people to help themselves through meaningful public work programs. By improving the infrastructure and economic environment of the poor, the program would respond to the needs of the growing numbers of unemployed youths and women. The strategy of the Social Action Program of working through and strengthening existing institutions would further strengthen planning and project implementation capacity. The crucial issue now, he observed, was the need to assure effective implementation of the program. This would require creating an effective partnership between the Government and donors, and among the donors themselves. Five considerations would be especially important in this regard. First, it would be important to initiate quick administrative action to start the process of implementation. Second, the necessary institutional arrangements should be spelt out carefully and in detail. Third, the necessary legal and regulatory policy changes required to support the program should be enacted at once in order to create an appropriate enabling environment. Fourth, there should be sufficient flexibility to allow reallocation of resources or changes in investment  - 12 - priorities to reflect the experience of project performance. And lastly, the necessary funding for the various activitieswould need to be disbursed quickly in order to reach the targetedbeneficiarieson a timely basis. All these activitieswould call for continued close collaboration and consultationbetween the Government and donors in the coming months. Discussion of the Social Action Program 34. A special session of the Group'z meeting was devoted to the examination of the Government'sSocial Action Program. As had been indicated in the plenary session on the issue, donors generallywelcomed the initiative. There was also a widespread view that a lot more work by the Governmentwas needed to specify the details, identifynext steps, and assure effective implementation. Many speakers, concerned about this aspect, stressed the need for the Government to take strong and swift action. Particular areas of interest included: (a) institutional arrangements for program implementation:(b) financingmechanisms; (c) project content of the program; (d) administrative and legislative requirements for facilitatingimplementation; and (e) baseline studies to delineate more accuratelythe problem of vulnerable groups in Zambia. 35. With regard to implementation mechanisms, the Governmentof Zambia stated that the main vehicle for implementation would be the relevant sectoralministries. Since the program was a major component of the PIP, the projects within the social sector reflected the same sectoral priorities as the ministries concerned. Moreover, there was a need to avoid creation of additional or new implementingagencieswhich would over- extend the capacity of the Government to implement the program. To the extent that the Social Action Program complementedongoing government activities, there would be a need to strengthenthe institutionsinvolved. Local communities and the Non-Governmental Organizations(NGOs) would have of a critical role to play in the implementation the program. 36. With regard to the question of financingmechanisms, there was a need to clarify and streamlinedisbursementprocedures in order to facilitate efficient and rapid funding of the program. Although there were established governmentprocedures for dealing with aid programs, the Social Action Program posed a special challenge in that the scale of some of the operationswas too small to be covered by bidding and procurement procedures. There was a need therefore, to urgently review these procedures, particularly in view of the fact that there were donor funds currently lying idle, which could be used to finance such activitiesonce these uncertaintieshad been cleared. The Government of Zambia undertook to review such regulationsto take advantage of the promised financing for the program. Government procurementproceduresand systems for handling counterpart funds, would, in this regard, be reviewed to facilitateoptimal implementationof the program, he said. 37. It was generally observed that the program needed to be refined further to identifypriorities and eliminate possible duplicationof projects, given the wide-rangingnature of the program. It was particularly important to review the costs of various programs to see what was feasiblewithin the resource and managerial constraints of Zambia. The  - 13 - integrationof the activitiesof the NGOs into the program was, in this regard, particularlyimportant. Furthermore,effective donor coordination was essential to achieve these goals. 38. It was the view of the participantsthat the regulatory, administrativeand legal frameworkgoverning the establishmentand operation of informal sector income generatingactivitiesneeded to be urgently reviewed in order to enhance the participationof Zambians in the activities of the program. The operative environment for many of these activities remained unresponsiveto the needs of the urban and rural poor. Urgent action on this front would also reinforce the Government'sown efforts of diversifyingthe economy by encouragingnon-traditional exports and enhancing the role of the private sector in the economy. 39. Lastly, the participantsrecommendedthat in undertakingthe Social Action Program, the Zambian authorities should as far as possible rely on local expertise and institutions. To this end, there was a need to conduct more baseline studies in order better to delineate the extent, structure and strategy for dealing with poverty issues. Various suggestionswere made for enhancing incentivesto skilled Zambian manpower, but the representativeof the Governmentof Zambia assured the meeting that actions to review salaries in the public sector were underway. 40. The Government of Zambia undertook to call an urgent meeting with donors in Lusaka in a few weeks time to follow up on the very helpful suggestionsmade by the Group on implementation the program. of (d) Debt, Arrears and Financing Requirements Statement by the Government of Zambia 41. In presenting the Government'sposition on debt and arrears, Minister Chigaga noted that the magnitudes and dimension of Zambia's debt constituted a formidable challenge to both the Governmentof Zambia and the internationalcommunity. At $7.2 billion, Zambia's stock of debt translated into a per capita indebtednessof $950, perhaps the highest in the world. The problem of Zambia's debt had placed the country into an economic impasse from which it could not escape without the support of the internationalcommunity. The Minister thereforecalled for urgent actions to resolve this predicament. In a further supplementarystatementon the debt issue, the Minister called for actions to de-link the process of resolution of non-multilateral debt and arrears from the ongoing efforts within the Fund and the Bank to find a solution to Zambia'shuge arrears to those institutions. In this regard, he hoped that the Paris Club could be convened in the next two to three months to deal with the issue of bilateral debt. In any case, the Minister stressed,measures to relieve the debt burden should be taken urgently in order to forestall the prospects of disenchantment with the reform program. Statement by the World Bank 42. In his introductoryremarks to the discussionon debt, arrears and financing requirements,Mr. George Gebhart outlined the structureand  - 14 - composition of Zambia's debt. Briefly, as of the end 1989, Zambia's total debt and arrears stood at about $7.2 billion, of which $3.8 billion was principal and interest arrears. Of the total debt outstanding,$2.5 billion, including arrears, were obligationsto the multilateral institutions;while $2.7 billion was owed to the bilateral institutions; and $0.7 billion in private long-term debt and a further sum of $1.3 billion in private short-termdebt. Of particular concern in relation to Zambia's financing requirements was the $1.3 billion still in arrears to multilateral institutions,particularlythe $987 million owed to the Fund, and $217 million due to the Bank. The difficultiesin clearing these arrears to the Fund and the Bank had precluded those institutionsfrom playing a direct role in financing Zambia's adjustmentprogram. As had emerged from the March Pre-Consultative Group meeting on this problem, it was difficult to envisage the donors providing the amount of $1.3 billion to clear arrears to those institutions,and absorbing reschedulingof bilateral debt, while at the same time providing additional financial support for imports and investmentneeds under Zambia's adjustmentprogram. During the Pre-CG meeting, donors had urged the Bank and the Fund to find innovativeways and means to solve this problem. As the representative of the IMF had earlier indicated, specificproposalswere under consideration in the Fund Board and it was hoped that a decision could be taken by the time of the May 7, 1990, meeting of the Interim Committee. 43. On the important question of Zambia's external financingneeds, the tables that had been circulatedto donors (see Attachment 2 to the full text of Mr. Gebhart's statement in Annex XII of this report) showed a financing requirement,after rescheduling,of $702 million for 1990 and $1,835 million in 1991, under the assumptionthat the arrears to the multilateralswould be cleared early in calendar 1991. The financing tables also assumed reschedulingof bilateral debt under Toronto terms and full service of Bank and Fund obligations. Depending on the outcome of the simultaneousversus sequentialclearance decisions,it would be possible to prepare more definite tables on financing requirements. For the moment, the tables on financing requirementsshowed projectionsof inflows of $350 million in 1990, and $1,200 million in 1991. The inflows in 1990 would comprise contributionsfrom donors in the form of both investmentand quick disbursing SPA resources. The projectionsfor 1991 inflows assumed a resumption of IDA and IMF activity following the clearance of arrears. The pattern of financing requirementsalso highlighted the fact that if ways and means could be found to finance the gaps in 1990 and 1991, the financing requirementsin subsequentyears would appear manageable. Much still remained to be done, but above all, he stressed, successful resolution of these problems would hinge criticallyon the satisfactory implementationof the reform program by Zambia. Discussion on Debt, Arrears, and Financing Requirements 44. In discussing Zambia's debt, arrears, and financing requirements,participants recognizedthat the situation of Zambia called for extraordinarymeasures over and above existing arrangementsfor debt relief and concessionalassistance. The size and structure of Zambia's debt also called for concerted action by Zambia'screditors under the Paris and London Clubs. Donors welcomed the considerationof an "accumulation of  - 15 - rights" approach within the Fund and urged an early decision on the adoption and implementation of the rights approach and its applicationto Zambia. Related to this was the need to arrive at an early decision on the question of sequentialversus simultaneousclearance of arrears to the Fund and the Bank. Support to Zambia's adjustmentprogram required an early resumptionof IDA and Fund activities in Zambia, but this could not be initiated before the resolution of these other matters. 45. With regard to the question of "accumulation rights," the of representativeof the IMF reiteratedthat while this approachhad generally been endorsed by the Fund, a formal decision on the mechanisms of its implementation was still awaited. In her opinion, matters still stood as indicated in Mr. Bornemann's statementto the Pre-CG (Annex XIII). On the suggestionof using balances from previous IDA credits to Zambia to clear part of the arrears to the Bank, the Chair observed that IDA resources could not be used for this purpose. However, once Bank arrears had been cleared, IDA would consider the suggestionmade by several delegationsto front load disbursementsas feasible. Participantsthen made various indicationsof financing assistanceto Zambia. A total of about $450 million in additional financial assistance, in the form of $200 million for investment support and $250 million in SPA quick-disbursing resources,was indicated at the meeting. Donors urged that in order to maximize the effectivenessof this assistanceto Zambia, it would be necessary to streamline and harmonize procurement and disbursementprocedures in advance of the expected flows of such resources. In this connection,participants welcomed the proposed joint Bank/donorprocurementmission to Zambia. The draft terms of reference for the mission were circulatedto, and endorsed by the Group. Finally, all participantsunderscoredthe fact that the pledges of assistancemade were contingentupon Zambia maintaining the course and direction of policy reform as outlined in the documents to the ConsultativeGroup. Moreover, the assistancewas predicatedupon early formulation of a viable financingplan, and the resolutionof Bank and Fund arrears issue, as well as the appropriateParis Club arrangements. (e) Other Business 46. The Group approved the text of the Press Release (Annex XVI) which was then issued by the Bank. (f) Closing Remarks by the Zambian Delegation 47. In his closing remarks on behalf of the Zambian delegation, Minister Chigaga thanked the Chairman for the businesslikemanner in which he had conducted the meeting. The Minister also thanked all the delegations for the understandingthey had shown of Zambia'sdifficult economic situation. The Minister thanked in particular those countries that had been able to make concrete indicationsof financial support to Zambia, and urged those who had been unable to do so to make further efforts in the near future. The Minister further took note of the fact that disbursementsand flows of much of these funds would be conditionalon the successful resolutionof the question of arrears to the Fund and the Bank. In addition, the Minister urged donors to come up with solutionsto the debt problem which were compatiblewith the present economic  - 16 - circumstancesof Zambia. A well-structureddebt work out plan was, in his view, a necessary condition for the resumptionof the resource flows in support of Zambia's adjustmentprogram; and in this regard, he called upon the governments represented at the meeting to do all they could to facilitate an early meeting of the Paris Club. Finally, the Minister reiterated the commitmentof the Zambian Governmentto the reform program and assured the Group that all the views expressed during the meeting would be taken into account in strengtheningthe reform program. ClosinR Statement by the Chairman 48. In his closing statement,Mr. Sandstrom thanked the government of delegation and the representatives donor agencies for the substantive and frank discussions on the difficult and sensitive issues pertaining to the content and financing requirements of Zambia's reform program. The evolution and sustainability of Zambia's adjustmentprogram required that the Government and donors alike strengthentheir efforts to remove the impedimentsto reform and growth in Zambia, he observed. The adequate financing of Zambia's adjustmentprogram, however, called for an urgent solution to Zambia's debt and arrears problem. 49. On the particular question of the content and direction of Zambia's adjustment program, there was general agreement that the reform program was substantivelyappropriate and moving in the right direction. The meeting endorsed the policy actions which the Governmentof Zambia had taken since last June to stabilizethe economy and to lay the foundation for economic revival. There was a consensus on the need to maintain progress and to consolidateand broaden the reform program in order to bring about a turnaround in economic performance. Participantsfelt that actions in five key areas would be necessary to strengthenthe program, he noted: (a) Measures to streamlinethe parastatal sector in order to limit its claim on scarce resourcesand to ensure that parastatal activitieswere conducted on a commercialand economicallyviable basis. In this regard, actions to reduce the scope of the parastatal sector such as privatizationand divestitureof non-viableentities should be considered. (b) Actions to enhance and increase the role of the private sector through more effective incentivesand the creation of an enabling environmentfor private entrepreneurship were essential,the meeting observed. There was a need to streamlineprocedures and regulationsin order to eliminate the obstacles to fuller participationin the economy by small-scaleenterprises,particularlythe informal sector. (c) The Public investmentprogram. Participantshad pointed out the need to maintain consistencyand balance in the public investmentprogram between capital and recurrent expenditures;the size of the investmentprogram vis-a-vis the need to cater for private sector investmentneeds; the mix of new investmentsversus rehabilitation needs, and  - 17 - finally the capacity of the Governmentto implementthe program. Participantsalso urged the Governmentto continue its efforts to reform the civil servicewhile improving the incentivesfor retaining skilled and experienced staff. Many donors also stressed the need to strengthenand build local capacity for program implementationand economicmanagement, and several donors indicated their willingness to increase their support in this area through technical assistanceprograms. (d) Social Action Program. Participants had welcomed the proposals for the Social Action Program, but had stressed the need to take concrete actions for the urgent of implementation the program. The meeting had also noted the need to continue increases in the funding of social services as part of a pro-activeapproach to poverty alleviation. (e) Effective Participationin the DevelopmentProcess. This was a theme which cut across virtually all of the other issues, and participantshad noted the need to take further actions towards decentralization and to create a conducive environment for effectiveuse and retention of skilled Zambians. 50. Turning to the critical issue of financing the program, Mr. Sandstrom noted that participants had recognizedthe need for extraordinarydonor support to Zambia's adjustmentprogram. The indications of assistance totalling $450 million in the form of $200 million in investment support and $250 million in fast disbursingSPA type resources for 1990 was testimony to the internationalcommunity's commitment to Zambia's adjustmentefforts. However,Mr. Sandstromnoted that the key condition to this support was Zambia's continued implementationof the reform program. He also noted that about half the indicated support was conditionalon a resolutionof multilateralarrears and an early Paris Club agreement. The support towards closing the 1990 financing gap would effectivelyprovide about a third of the 1990 base scenario gap of $352 million, and it was up to the donor governmentsacting either individuallyor collectivelyto mobilize the remaining funds. It was, however, important that urgent actions be taken to translate these indications into concrete flows of resources to Zambia and, in this regard, the proposed joint procurementmission to streamlinedisbursementand procurement procedures in Zambia was timely. 51. With regard to the sensitiveand complex problem of Zambia's debt and arrears, Mr. Sandstrom observed that Zambia's situationhad in effect become a test case for the internationalcommunity on how to solve such problems but, in his view, the institutionalissues involved in Zambia's case would require resolutionoutside the context of the ConsultativeGroup. During the discussionon this issue, four main points had emerged, he noted:  - 18 - (a) Participantshad stressedthe extreme urgency in arriving at a decision on the "accumulation rights" approach of within the IMF. (b) Participantshad called for an early decisionby the shareholdersof the Bank and the Fund on the question of sequentialversus simultaneous clearance of the Bank and Fund arrears in order to permit an early resumptionof IDA operations in Zambia. (c) In anticipationof these developments,participants had urged Bank staff to consider innovativeand fresh approachesin the design of IDA operations in Zambia such that IDA disbursements would contributeto closing Zambia's financing gap. The Chair had, however, drawn the attention of participantsto the fact that IDA could not finance or otherwise help Zambia clear World Bank arrears. Rather, the questionwas, he stressed,how to facilitateIDA's optimum and timely contributionto Zambia's financing program, while recognizinginter-aliathe need for equitable treatment of all IDA recipient countries. (d) Participantshad also urged the Fund to seek new approaches to deal with IMF annual charges during an "accumulationof rights" period. 52. In view of the continuinguncertaintieswith regard to the financing of the program and the resolutionof the multilateralarrears problem, the CG agreed to reconvene in two or three months time. Mr. Sandstrom closed the meeting by expressing special appreciationfor the support staff and the translatorswho had contributed diligentlyto the logistical ease of the meeting.  -19- ANNEX I Page 1 of 3 ZAMBIA: CONSULTATIVEGROUP MEETING PARIS. APRIL 9-11. 1990 AGENDA I. Progress Towards Economic Adiustment Statements by the Zambian delegation, the Bank and the Fund on Zambia's adjustmentprogram, particularlythe measures the Government is taking to deepen and ensure the sustainability of economic reform. -- Discussion. 1/ II. Proaram Implementation Description by the Governmentof Zambia of actions to strengthen program implementation and considerationof short and medium term technical assistanceneeds; followedby review of the Government's Social Action Program. -- Discussion. III. Debt and Arrears Considerationof approaches to deal with Zambia's debt and arrears drawing upon the analysis and guidelinesof the Pre-Consultative Group meeting. Brief statementsby the Governmentof Zambia, Bank and the Fund followed by a general discussion. IV. Financial Requirements Considerationof financial assistanceneeded to close the 1990 financing gap. Introductoryremarks by the Bank. -- Discussion and indicationsof levels of support to Zambia from donors. V. Closing Remarks Closing statementsby the Governmentof Zambia and the Chairman. l/ In the light of the substantialagenda before the meeting, and the limited time, it is suggested that participantskeep their interventionsin this and other sessionsvery brief.  - 20 - ANNEX I Page 2 of 3 CONSULTATIVE GROUP FOR ZAMBIA PARIS, APRIL 9-11, 1990 TIMETABLE MONDAY, APRIL 9, 1990 1 13:00 - 14:30 Registration of Delegates and Participants 14:30 - 16:00 Chairman's Opening Statement Statement by Government of Zambia Statement by Representative of the Bank Statement by Representative of the Fund 16:00 - 16:30 Coffee Break 16:30 - 18:00 Discussion 1/ 19:30 Dinner for Donor Heads of Delegation at the Hotel Prince de Galles TUESDAY, APRIL 10. 1990 8:30 - 10:30 Discussion continued (with statement by Government on Program Implementation, and the Government and Bank on the Social Action Program). 10:30 - 11:00 Coffee Break 11:00 - 13:00 Debt, Arrears and Financing Requirements Statement by Government of Zambia Statement by the IMF Statement by the Bank Discussion 13:00 - 14:30 Buffet Luncheon for all participants at the Bank offices. 14:30 - 16:00 Discussion, continued 1/ Participants are requested to keep their interventions short in order to permit a wider exchange of views.  - 21 - ANNEX I Page 3 of 3 TUESDAY, APRIL 10, 1990 (Cont'd) 1 16:00 - 16:30 Coffee Break 16:30 - 17:30 Discussion, Continued WEDNESDAY, APRIL 11, 1990 8:30 - 10:30 Discussion of Financing Requirements concluded 10:30 - 11:00 Coffee Break 11:00 - 12:00 Recess of Plenary for Bilateral discussions. 12:00 - 12:30 Agreement on Press Release 12:30 - 13:00 Closing Statements Statement by the Government of Zambia Statement by the Chairman  - 22 - ANNEX II Page 1 of 8 ZAMBIA CONSULTATIVE GROUP MEETING Paris. Monday-Wednesday. April 9-11. 1990 FINAL LIST OF PARTICIPANTS CANADA Mr. Pierre Racicot Head of Delegation Vice President Anglophone Africa Branch Canadian International Development Agency Mr. F. Robert Pim Counsellor, Development Canadian High Commission Lusaka DENMARK Mr. Mark Jensen Charge d'Affaires DANIDA, Lusaka FINLAND Mr. Tauno Kaaria Head of Delegation Deputy Director General FINNIDA Ministry for Foreign Affairs Mr. Raimo Anttola Counsellor, Coordinator for Southern Africa FINNIDA Ministry of Foreign Affairs Mr. Olli Leskinen Economist FINNIDA Ministry of Foreign Affairs Mr. Matti Kaariainen First Secretary Embassy of Finland, Lusaka  23 - - ANNEX II Page 2 of 8 FRANCE Mr. Gilles Vaysset Head of Delegation Adjoint au Chef du Bureau Afrique et Ocdan Indien Directiondu Tresor Mrs. Viviane Serre-Garnier Attache d'Administra'tion Bureau Afrique et Oe,an Indien Directiondu Tresor Mr. Jean-MarieBellat ConseillerCommercial Ambassadede France A Lusaka Mr. FrancoisCroquette Directiondes AffairesAfricaineset Malgaches Ministeredes AffairesEtrangeres GERMANY Dr. Rainer Barthelt Head of Delegation Head of Divisionfor SouthernAfrica FederalMinistryfor EconomicCooperation Ms. Ingrid-GabrielaHoven CountryOfficer for Zambia and Mozambique FederalMinistry for EconomicCooperation Mr. Claus-MichaelGurlitt Head, Southernand EasternAfrica Division Kreditanstaltfar Wiederaufbau IRELAND Mr. Edward Justin Carroll Desk Officer for Zambia DevelopmentCooperation Division Departmentof ForeignAffairs ITALY Mr. RiccardoLeonini Head of Delegation EconomicDepartment Ministry of Foreign Affairs Mr. Sergio Barbanti Africa Desk Ministry of ForeignAffairs Mr. FabrizioCosta Advisor,Africa Department Ministryof the Treasury  -24- ANNEX II Page 3 of 8 ITALY, cont'd Mrs. Giovanna Ruffaldi Ministry of Foreign Trade Mr. Antonio Bandini Permanent Delegation to the OECD Mr. Hiroshi Okada Head of Delegation Senior Assistant Economic Cooperation Bureau Loan Aid Division Ministry of Foreign Affairs Mr. Ichiro Muto Southern Africa Desk Ministry of Foreign Affairs Mr. Tatsuyoshi Otobe Second Secretary Embassy of Japan, Paris Mr. Katsuhiko Chihara Financial Attache Embassy of Japan, Paris Mr. Yoshitaro Fuwa Chief Representative OECF, Paris Mr. Kuneo Okamura OECF, Paris Mr. Itaru Hamakawa JICA, Paris NETHERLANDS Mr. Wim G. Wessels Head of Delegation Director Development Cooperation with Africa Ministry of Foreign Affairs Mr. A. W. Fred Roos Head of Southern Africa Division Ministry of Foreign Affairs Mr. Bart Van Bartheld Southern Africa Desk Ministry of Foreign Affairs  -25- ANNEX II Page 4 of 8 NORWAY Mr. Olav Myklebust Head of Delegation Director General Department of Bilateral Development Cooperation Ministry of Foreign Affairs Mr. Dag Briseid Advisor on African Affairs Ministry of Foreign Affairs Mr. Gunnar Boe Deputy Regional Director, Africa NORAD Mr. Jon Lomoy Head of Division Southern Africa NORAD Mr. Haakon Hellebust Senior Economist NORAD, Lusaka SWEDEM Mr. Jan Cedergren Head of Delegation Deputy Director General Swedish International Development Agency Mr. Per Taxell Director Department of International Development Cooperation Ministry of Foreign Affairs Ms. Anna Brandt First Secretary Department for International Development Cooperation Ministry of Foreign Affairs Mr. Bjoern Larsson Desk Officer, Zambia and Zimbabwe Swedish International Development Agency Mr. Kjell Nystrom Head of Development Cooperation Office Swedish International Development Agency Swedish Embassy, Lusaka SWrTZERLAND Mr. Thomas Eggenberger Desk Officer for Zambia Federal Office for Foreign Economic Affairs  ANNEX II 26 - Page 5 of 8 UNITED KINGDOM Mr. Barrie Hudson Head of Delegation Under Secretary,Africa OverseasDevelopment (ODA) Administration Mr. Peter Sandersley Senior Economist,Africa Africa Region,ODA Mr. Guy Hobson Division Analyst, International Bank of England UNITED STATES Mr. Fred C. Fischer Head of Delegation Director Office of SouthernAfrican Affairs U.S. Agency for InternationalDevelopment(USAID) Mr. Leslie A. Dean Director, USAID/Zambia Mr. Lloyd George Deputy Director,EconomicPolicy Unit Africa Bureau Departmentof State Mr. Blaine D. Porter EconomicCounsellor U.S. Embassy,Zambia AFRICAN Mr. BaelhadjMerghoub Head of Delegation DEVELOPMENT Director BANK(AfDB) Country ProgrammesDepartmentI Mr. Stephen Owusu PrincipalEconomist CountryProgrammes Mr. Victor Wahba Senior Loan Officer Country Programmes COMMISSIONOF Mr. Giorgio Bonacci Head of Delegation THE EUROPEA DivisionChief COMMUNITIES East Africa and Zambia (CEC)  -27- ANNEX II Page 6 of 8 CEC. cont'd Mr. Roger Moore Desk Officer, Zambia Ms. Anne Bulher Economic Advisor, Zambia Ms. Emanuela Reviglio Assistant, Zambia Desk EUROPEAN INVESTMENT Ms. Jacqueline Noel Head of Delegation BANK (EIB) Head of Division East Africa and Pacific Department Mr. Luigi Genazzini Head of Department Economic Research Mr. Christian A. Schmidt Senior Loan Officer Eastern Africa Department INTERNATIONAL Ms. Burke Dillon Head of Delegation MONETARY FUND Division Chief (IMF) Southern Africa Division II Ms. Naheed Kirmani Assistant Division Chief, Trade and Payments Division Exchange and Trade Relations Department OPEC FUND FOR Mrs. Jumana Dejany INTERNATIONAL Loan Officer, Operations DEVELOPMENT Africa Department UNITED NATIONS Mr. Ian G. Hopwood CHILDREN'S FUND Representative in Lusaka (UNICEF) UNITED NATIONS Mr. Mathias Lubega Head of Delegation DEVELOPMENT Chief PROGRAMME (UNDP) Southern Africa Division Mr. Alieu Sallah Resident Representative Zambia  ANNEX II -8 - 2 Page 7 of 8 Hon. Gibson Gerald Chigaga Head of Delegation SC, MCC, MP Minister of Finance and National Commission for Development Planning Hon. Enos Mulambo Haimbe, DFS, MCC, MP Minister of Power, Transport and Communications Hon. Francis H. Kaunda, MCC Chairman and Chief Exacutive, ZCCM Mr. James Chando Mapoma Special Assistant to the President (Economics) Dr. Jacob M=Hi Mwanza Deputy Secretary to the Cabinet (Economics and Finance) Mr. Lennard Nkhata Senior Permanent Secretary Ministry of Finance Mr. M.M. Liswaniso Permanent Secretary (Economic Cooperation) H.E. Mathias Mainza Chona Ambassador Embassy of Zambia in Paris Mr. J.A. Bussieres Governor Bank of Zambia Mr. Martin G. Sakala Deputy General Manager Bank of Zambia Mr. Davison Mendamenda Principal Economist National Commission for Development Planning Mr. Salvator Mambo Tembo Senior Economist Ministry of Finance Mr. Muyambo Sipangule Second Secretary Embassy of Zambia, Paris MXECUTIVE IRECTOR Mr. James Nxumalo Advisor to Executive Director World Bank  -29 - ANNEX II Page 8 of 8 WORILDBAN Mr. Sven Sandstrom Chairman Mr. Harold Messenger Mr. Roger Grave Mr. David de Ferranti Mr. George Gebhart Mr. James Karuga Mr. Sarshar Khan Resident Representative Zambia OBSERVERS ARAB BANK FOR Dr. Mamoun M. Yassin ECONOMIC DEVELOPMENT Acting Director of Projects, Programmes IN AFRICA (BADEA) and Legal Affairs Department FOOD AND AGRICULTURAL Mr. Frederick Livingston ORGANIZATION (FAO) FAO Representative, Lusaka ORGANIZATION FOR Mr. Cory Highland ECONOMIC COOPERATION Economist AND DEVELOPMENT Financial Policies Division (OECD) Aid Management Division  - 30 - ANNEX III Page 1 of 6 ZAMBIA CONSULTATIVEGROUP MEETING Paris, April 9-11, 1990 Chairman'sOpening Statement DistinguishedGuests, Ladies and Gentlemen, I am pleased to welcome you all to this meeting of the ConsultativeGroup for Zambia. For some of you, this is the second meeting on Zambia that you are attending in less than a month. The presence here today of so many donor governmentsand internationalorganizationsis tangible proof of your commitmentand support to Zambia's efforts to reform and restructure its economy. We extend our warm welcome to the Hon. Chigaga, Minister of Finance and National Commission for Development Planning, the Hon. Haimbe, Minister of Power, Transport and Communications, and other members of the Zambian delegation. The seniority of your delegation demonstratesthe importancethe Governmentof Zambia attaches to these deliberations. This meeting takes place at a particularlycriticaljuncture in Zambia's adjustment process. After a prolonged period of economic decline, punctuatedby significantbut unsustainedreform measures, Zambia has again embarked on the difficult path of economic reform. But this task, daunting at best, is made doubly difficult by Zambia's reduced internaland external resources to sustain the reform program. On the domestic front, the  - 31 - ANNEX III Page 2 of 6 capacity of the Governmentto maintain essential social servicesand infrastructurehas been reduced by a shrinking revenue base, exacerbatedby serious deteriorationin public sector management capacity. On the external front, access to external resourceshas been constrainedby a massive debt overhang and policies which have inhibited the effectiveuse of the limited resources available. How to relieve these constraints in the short and medium term, while respondingto Zambia's long-term growth needs, is the key question before us during the next two days, and beyond. The basis for the adjustmentprocess was laid out in the Policy Framework Paper agreed upon by the Government,the Fund and the Bank, last September. The Fund-monitoredannual program for 1990, on which the Government has embarked, has further extended and deepened this policy initiative. The Government of Zambia has maintained a close and productive policy dialogue with the Bank and Fund on the many elements of the adjustmentprogram and there has been good progress in implementingmany of the difficult policy decisions underlying the program. Although it is too early for many of these actions to have an impact on economicperformance, there are indications that the measures are beginning to have the desired macroeconomiceffects. Inflationhas started to abate, and fiscal performance has been encouraging. It is essential that the stabilization elements of the program succeed in restoring internaland external macroeconomicbalance. Beyond stabilizationthere is need to strengthenand extend the reforms in order to integrate longer-termrestructuringand poverty  - 32 - ANNEX III Page 3 of 6 reduction with sustained macro-balance. This will only be feasible in a context of positive per capita income growth, which in the medium term at least will depend crucially on adequate external financing. On the difficult and complex problem of resolving Zambia's debt and arrears, I would like to take a few minutes to speak openly and frankly with you about this problem. The tables we have distributedprior to this meeting detail the full dimensionsof the problem, particularlyas it pertains to Zambia's arrears to the IMF and the World Bank. We are all fully aware of the need to move as quickly as possible to clear Zambia's arrears and achieve positive net capital flows to Zambia. However, several decisions remain to be taken. Of special importance in this regard is the Fund's considerationof the "accumulation rights" approach, on which no of decision has been taken yet. Furthermore,Bank and Fund shareholderswill have to resolve the issue of how to reconcile Zambia's difficult circumstanceswith the currently agreed procedureswhich mandate the simultaneousclearance of arrears to the Bank and Fund. Nevertheless,we have begun to explore the valuable suggestionsmade at the pre-CG meeting concerning front loading of disbursementsfrom old and new IDA credits. These possibilitiesraise some significantissues of equitable application of Bank policy among borrowers which, however, cannot be decisivelytackled until the questions regarding the "accumulation rights" approach and of simultaneousversus sequentialclearance of the arrears are resolved. The next step in this process is likely to be the meeting of the Interim Committee scheduled for early May when the Fund's "accumulation rights" of approach could be considered.  - 33 - ANNEX III Page 4 of 6 We will have an opportunityto consider the financingplan in greater detail tomorrow, but I wanted to inform you at the outset that while recognizing the constructivespirit of the suggestionsmade at the pre-CG meeting, we are not in a position to go beyond the scenario that has been distributed. We are, in effect, awaitingyour decisions as shareholdersof the Fund and the Bank. And more immediately,we look forward during this meeting to your indications, donors, of the direct as financial support you can provide to Zambia. While financing issues will understandably of concern for all be of us over the next two days, we should not lose sight of the key issues related to the content and pace of reform as this ConsultativeGroup resumes its dialogue with the Zambian authorities. To initiate this discussion I will turn shortly to the Hon. Chigaga who will review the measures the Government is taking to strengthenand deepen the reform program, followed by comments on the program by George Gebhart of the Bank and Burke Dillon of the Fund. I suggest that we break for coffee after these statements, followed by an open discussionon Zambia's adjustment program. We plan to adjourn this afternoon'sdiscussionat about 6:00 pm. When we reconvene at 8:30 am tomorrowmorning, I propose that we resume the discussion started this afternoon,but focus more specificallyon measures to strengthenprogram implementation. We will hear from the Zambian delegation on the actions that Government is taking to strengthenthe management of the adjustmentprogram. This would be an opportunemoment to bring donors up to date on the progress in mobilizing the technical  - 34- ANNEX III Page 5 of 6 assistance associatedwith the adjustmentprogram. During tomorrow morning's session we will also take up the Government'sSocial Action Program. The Zambian delegation and David de Ferranti of the Bank will lead off this part of the discussionwith brief comments on the social action strategywhich aims to ensure that the vulnerable groups fully participate in and benefit from the adjustmentprogram. The Meeting would recess at 1:00 pm tomorrow for a buffet luncheon on the premises to which all of you are invited. About mid-day tomorrow,we would shift the focus of the discussion to Zambia's debt, arrears and financialrequirements,both for closing the 1990 financing gap and over the medium term as laid out in the documentationcirculated to you. The Zambian delegationwould lead off with an introductorystatement, followedby an update by Burke Dillon on the arrears to the Fund. After a brief review of the financing plan by George Gebhart of the Bank, you will have an opportunityto express your intentionswith regard to your contributionstowards closing the financing gap, as well as any other aspects of financial support to Zambia. Discussions on this vital questionwould continueuntil 5:30 pm, when the meeting would recess for the afternoon. We will reconvene on Wednesday, at 8:30 am, and continuewith the discussion on financial requirementsfor Zambia's adjustmentprogram. After the mid-morning coffee break, the meeting would go into recess to afford the donors an opportunityto consult amongst themselvesor to meet  - 35 - ANNEX III Page 6 of 6 separatelywith the Governmentof Zambia officials,and Bank staff on any outstanding issues. Those who wish to take advantage of this opportunity, please contact James Karuga of the Bank's delegation,who will coordinate the schedule. Around mid-day on Wednesday,we would reconvene to agree on a press release and aim to bring the meeting to an end before lunch. to If these arrangementsare satisfactory you, let us begin the discussionby calling upon the Hon. Chigaga,Head of the Zambian delegation.  - 36 - ANNEX IV PFag-eI ot 2 STATS HOUSE LUSAKA THI SlPUSLIC Of ZAMBIA 6th April, 1990. First of all, I would like to send you my good wishes on this very important occasion of the meeting of the Consultative Group on Zambia. I would also wish to express my thanks and gratitude to all donors who participated in the infor- mal donors meeting which was organised in Paris on 28th July, 1989. The resources which were pledged then have now started to arrive in the country and they are greatly assisting our people in alleviating the impact of the structural adjustment measures that we have put in place. As I did in the last meeting, I am again sending my colleague, the Minister of Finance and National Commission for Development Planning, Hon. G.G. Chigaga, SC, MCC, MP, and his delegation to participate in this current Consultative Group. I am pleased to inform you that since the last meeting, my Government has taken further measures to deepen and strengthen the structural adjustment poli- cies that we initiated in July, 1989. We have now agreed with the IHF and the World Bank on a policy memorandum for 1990. This document outlines further measures we have implemented on monetary and fiscal policy as well as on exchange rate. We are confident that these measures are steering the economy in the right direction. I would like, once again, to underline our determination to see this programme through and I have given our delegation a very clear mandate to convey this assurance to the meeting. /... The Chairman, Consultative Group Meeting, PARIS.  ~ 37 - ANNEX IV Page 2 of 2 In conclusion, I would like to appeal to all donors to support us in mobilising the necessary re- sources that will help lead our efforts to success. We have outlined the priority projects in the Public Investment Programme and we have also indicated our urgent requirements for Balance of Payments Support and the needs of the social action programme designated to cushion the vulnerable groups from the impact of struc- tural adjustment measures. May I, once again, assure you of our determina- tion and total commitment to the implementation of this programme. I look forward to the successful outcome of your meeting. God's blessings. Kenneth D. Kaunda PRESIDENT OF T0$dEPUDLIC OF ZAMBIA * - ~ PULI  - 38 - ANNEX V Page 1 of 9 ZAMBIA CONSULTATIVEGROUP MEETING Paris, April 9-11, 1990 Opening Statementby the Minister of Finance and National Commission For Development Planning of the Republic of Zambia, HonourableG. G. Chigaga, SC, MCC, MP Mr. Chairman, DistinguishedDelegates, Your Excellencies, Ladies and Gentlemen, This is the 5th ConsultativeGroup Meeting on Zambia. On behalf of my country, the Zambian delegationand on my own behalf, I express our profound appreciationto the World Bank for organisingthis and the previous meetings. I also thank the Governmentand people of France for the hospitality they continue to extend to us in support of these meetings. of To you, the distinguishedrepresentatives governmentsand international organisations,I say thank you for respondingfavourablyto the invitation. Mr. Chairman, a little while ago, in anticipationof this meeting, the Government of the Republic of Zambia sent missions to some capitals of representativespresent here. However, due to resource constraints on our part, it was not possible to cover all the countries. The purpose of the visits was to present, in advance, Zambia's documents to  - 39 - ANNEX V Page 2 of 9 this meeting, and where we could not reach, we passed on the message through the diplomatic corps in Lusaka. I hope that these efforts will facilitate the deliberationsof this meeting in the next few days. At the informal donors' meeting held last July in Paris, I dwelt, at length, on financial and economicproblems facing Zambia, the policies and programmeswe have adopted to deal with the problems, the prospects of growth, and our external assistancerequirements. The outcome of that meeting was most encouraging. The Governmentand people of Zambia are grateful for the generous response, for the understandingshown and for the cordial exchange of views on the direction of our economic reform programme. I propose to devote this address to a review of the current economic situation in Zambia. In this way, it will be possible for you to assess Zambia's commitmentto the reform programme,the pace of the reform and the contributionwhich your assistancecan make to our development effort. I hope, at a later stage, to have the opportunityof discussing with you our techical assistanceneeds for strengtheningthe capacityof the country to manage the implementation the economic recovery and of restructuringprogramme. Mr. Chairman, you will recall that riots erupted in December 1986 on the copperbelt following an attempt to reduce Governmentsubsidy on the staple food, maize meal. That unfortunateexperiencesent us on a search for a new strategy to economic reforms. We have since adopted the  - 40 - ANNEX V Page 3 of 9 strategywhich, while ensuring austerity,recognisesthe need to protect the most vulnerable members of our society. Economic adjustmentmeasures are now implementedalongside measures aimed at cushioningthe impact of adjustment on vulnerable groups in our society. This approach is enabling us to achieve a faster pace of reform without the risk of reversing the programme on account of adverse reactions from the public. The following economicmeasures are, among those that we have introduced and implementedsuccessfullysince November 1988: (a) An initial devaluationof the kwacha from K8 to K10 to one US dollar followedby a further devaluationto K16.08 per dollar at the end of June 1989 and a crawl that has devalued the kwacha further to K25.75 per dollar the day we left Zambia for this meeting. (b) Introductionof a new window for foreign exchange transactionsat market rate, initially set at K40 to one US dollar. (c) Elimination of all direct and indirect commodity price controls, except on maize. (d) Decontrol of road haulage rates, including for agricultural commodities.  - 41 - ANNEX V Page 4 of 9 (e) Implementationof a tight monetary policy package to reduce the rate of growth in money supply. (f) Introductionof user fees to beneficiariesof secondaryand higher education as well as health services. (g) Reducing maize meal subsidies through price increasesby allowing the price of a bag of roller meal to rise fivefold since January 1989. In the case of a bag of breakfast meal, the rise has been nearly sixfold. A targeted coupon system has helped to cushion the impact of these price rises on low-incomeearners. (h) Reducing fertiliser subsidiesby allowing prices to rise since the 1988/89 season by 450 percent to the current average price of K374 per 50 kg bag. (i) Broadening the tax base by bringing more goods into the tax net, including items like soaps and detergentson which price increases in the past were socially sensitive. (j) Shifting budgetary resources from consumptionto support the priority sector of agricultureand rehabilitationof education and health facilities.  - 42 - ANNEX V Page 5 of 9 I must say that these measures have begun to achieve their intended results. The budget deficit, on cash basis, declined from 9.5 percent of GDP in 1988 to 6.4 percent in 1989. Indicationsare that the budget deficit will decline further to about 5 percent of GDP in 1990. With the decontrol of prices, the rate of inflation for the twelve months ending December 1989 rose to 122.5 percent, compared to 62.1 percent for the same period in 1988. However, consumer resistancehas begun to have impact and prices have started to stabilize. The tight monetary policy is a major contributingfactor to this development. Money supply growth decelerated from 75 percent in June 1989 to 60 percent in December on annual basis. A further decline has been registeredsince, to 49 percent in February 1990. At this rate, the 1990 target of 30 percent growth in money supply is likely to be realized. The response of non-traditionalexports to measures taken, including the exchange rate, has been encouraging. Non-traditionalexport receipts increased from US$96 million in 1988 to US$124 million in 1989. The receipt are likely to rise to us $150 million in 1990. The full impact of all the economic measures, however, will take time to be felt. Mr. Chairman, although the measures have begun to achieve their intended results, the overall performanceof the economy in 1989 was unsatisfactory. GDP is estimated to have grown by 0.1 percent compared to 6.3 percent in the previous year. The low growth in 1989 is attributable, mainly, to the power failure arising from the extensive damage by fire to the Kafue Gorge Power Station,which adversely affected productionin our  - 43 - ANNEX V Page 6 of 9 industries, and to the heavy rains, at the beginning of the season, that swept away crops in many parts of the country. In addition,bridges and feeder roads were severely damaged,hampering the flow of inputs. Congestion of Zambian cargo at ports and other problems in the transport system also contributed to the poor performanceof the economy. The prospect of better economic performance in 1990, taking into account the prolonged drought conditions in January and February, is not promising. The performance,however,would have been worse had it not been for some improvement in the mining sector. Compared to a decline of 12.9 percent in 1988, the mining sector grew by 9.5 percent in 1989. This was, programme in the mining industry largely, a result of the rehabilitation and better metal prices on the internationalmarket. Mr. Chairman, the low level of economic growth in the country calls for additionalpolicy action. Recognisingthe significanceof agriculture in Zambia's efforts to restructurethe economy, the Government has introduced incentives to promote production and stimulate agricultural exports. These incentives include price decontrol and introductionof a market exchange rate and efforts are underway to establish an export revolving fund. We feel that these measureswill encourage our farmers to increase production of exportableproducts such as coffee, cotton, tobacco, groundnuts, fruits and vegetables, and beef, as well as wood products. The Government is, also, in the process of streamliningexport licensing. Priority attention is being focussedon decentralisingthe  - 44 - ANNEX V Page 7 of 9 issue of export permits. This will encouragemore exporters to take advantage of the exchange rate incentive. In the area of agriculturalmarketing,the Governmenthas decided to continue searching for ways of achieving improved efficiency. Policy initiatives in the manufacturingsector aim at achieving increased industrialefficiency. We intend to lower import tariffs to reduce protection of local industriesagainst external competition. We believe that this will promote efficient use of resources in the economy. I should, also, mention that Government is considering recommendationswhich have been made to revise the country's investment code. We want to encouragemore investmentby both local and foreign investors so as to address the problems of low domestic productionand high unemployment. With more investment,enterpriseefficiencyand capacity utilisationwill improve. In addition, a review of operationsof major parastatal companies will be made in 1990 to enhance their competitivenessand economic viability. This is an on-going exercise on which the World Bank has helped us before. We welcome their continued assistance. Mr. Chairman, the success of Zambia's reform programmewill depend, to a large extent, on financial support from the international community. It is in this light that we come with the following requests:  - 45 - ANNEX V Page 8 of 9 (a) Balance of payments support; (b) Project support;and (c) Debt relief. Among our requests, untied balance of payments support is a matter of highest priority. It is important that the entire population in Zambia begin to see, quickly, improvementsin production and employmentas well as a reduction in the level of inflation. Balance of payments support will help a great deal in this direction. Mr. Chairman, our request for project support is detailed in the Public Investment Programme (PIP) already circulatedto the donor community represented at this meeting. In preparing the PIP, we have made a careful analysis of all the projects and have further categorisedthem on the basis of higher priority considerations. Tables in the PIP are broken down by sector by sector in this way to facilitatedecision-making the donor community. of The PIP has also given special emphasis to implementation a Social Action Programme designed to cushion the impact of adjustmentof vulnerablemembers of our society,to a technical assistancepackage to of strengthen our capacity to manage the implementation the reform of programme and to projects aimed at maintenance and rehabilitation existing facilities. In view of the remaining short life of economic mining of copper, the PIP has, further, given priority attention to  - 46 - ANNEX V Page 9 of 9 projects related to stimulationof exports other than copper, lead, zinc and cobalt which are the country's traditionalexports. Mr. Chairman, I would like now to turn to the problem of Zambia's external debt. My Governmentwould like to request for generous debt relief in view of the magnitude of the problem. Our annual export earning of about US$1.0 billion is far too low to address the debt problem without internationalsupport. We need suggestionsfrom our creditors as well, on how best the problem can be resolved. A number of countrieshave decided to write off their portions of Zambia's debt. We thank these countries very much for their goodwill and support, and appeal to other creditors to consider helping Zambia in a similar manner. Mr. Chairman, in conclusionlet me mention that we have taken all these measures in a short space of time on our own. This is becausewe are convinced that the measures are necessary if we are to survive economicallyas a nation. We are committedto continue implementingour programme. Mr. Chairman, distinguisheddelegates,your excellencies,ladies and gentlemen,we have come to this meeting in the hope that you will understand our position and support us in our efforts, as friendly governmentsand internationalinstitutions. am confident that you wil I respond favourably to our requests, including the support for vulnerable groups in order to ease the pains of adjustment. Thank you.  - 47 - ANNEX VI Page 1 of 9 ZAMBIA CONSULTATIVEGROUP MEETING Paris, April 9-11, 1990 Statement by the World Bank on Zambia's Adjustment Program and Economic Prospects Ladies and Gentlemen, Zambia's economicprospects, particularlyover the medium and longer term, have improved considerablywith the adoption of the adjustment program that we are discussing in this meeting. If sustained,managed effectively and financed adequately, the macroeconomicand sector policy reforms already in place, and those anticipated,can remove the structural distortions that have plagued the economy during past decades and contribute to the restorationof economicvitality and positive per capita income growth. The success of the program will depend on sustained, effective implementationand adequate financing. The IMF representative, Ms. Dillon, will describe developmentsunder the macroeconomicprogram shortly. The Zambian economy did not fare well in the 1980s. In only two years of the decade, 1981 and 1988, was there positive per capita income growth and the decade was characterizedby increasingeconomic instability and hardship. As we enter the 1990s, the country's per capita income is only one-half the level of ten years ago. The economy also fared poorly in the 1970s when real per capita incomes fell on average by 2.3 percent per  - 48 - ANNEX VI Page 2 of 9 annum. Today, therefore,per capita incomes are less than 40 percent of 1970 levels. The cumulativeeffects of the two decades of economic decline are distressinglyevident in the lowered health and education status of the population, the deterioratedinfrastructure and the idled capacity of both labor and capital. Zambia's challenge in the 1990s will be to reverse these trends and reestablish self-sustainingeconomic growth. There were several attempts to reform the economy during the 1980s, but these largely came to naught; for a variety of reasons. At no time during this period was there a comprehensivereform program, implemented effectivelyand sustained long enough for there to be positive results. Early in the decade the reforms were partial and implementedtoo slowly. The 1985/86 program was comprehensivebut management capacity fell short, given the required pace of implementation. The resources available were also inadequate. As a result key elements of the program could not be sustained. It is clear from these experiencesthat strong commitment, adequate resources and adequate implementationcapacity are essential to the success of reform in Zambia. The present adjustmentprogram signals a significantdeparture from those of the past. It is a comprehensiveprogram, but doable. It has been strengthenedconsiderablyfrom what was contained in the PFP and is to be further reinforced during implementation. The pace of adjustmentis moderate - neither too slow, nor too fast - and there has been strong, broad-based commitment to the program in Zambia. Implementationcapacity, especially in the Ministry of Finance and the Bank of Zambia, is being  - 49 - ANNEX VI Page 3 of 9 buttressed by an integratedand coordinatedtechnical assistanceprogram. One key ingredient for the success of the adjustmentprogram still missing is the financing,which is one purpose for our meeting here this week. As the documents prepared for this meeting indicate, good progress is already being made in implementingthe adjustmentprogram, particularlythe macroeconomicreforms. Price liberalization, the steps towards a more realistic exchange rate and positive real interestrates, and the monetary and fiscal reforms, are all well underway. A good start has also been made in reducing subsidiesand targeting them to the poor. Sustained and consistent execution of these parts of the reform effort will not only bring about the stabilizationof macro balances that the economy requires, they will also lay the foundationfor the structural transformationof Zambia's copper-dominatedeconomy. The macroeconomicreforms are but part of the story, however. It is equally important that the sectoralreforms and investments,crucial to the supply response, be well-designedand effectively implemented. It will ultimately do little good to have stabilizedthe economy, only to find production and diversificationstymied because of inimical sectoral policies and programs. Hence, I will focus the rest of my statement on the substantial agenda for sectoral reform. It is clear that agriculturewill have to play a major role in the diversificationand future growth of the Zambian economy. The sector has good potential and progress has been made in establishingthe policy  - 50 - ANNEX VI Page 4 of 9 framework for achieving this. Except for maize, pricing at both the producer and consumer levels has been liberalizedand private traders are actively engaged in the marketing of most crops. Maize producer prices have been increased regularly in real terms, which accounts in part for the recent large gains in production. The objective is to move quickly to market determinationof maize prices at the producer and consumer levels, with the coupon subsidy-targetingscheme protecting the poor. Full-cost pricing, when achieved, will remove the present practical obstacles to private trading in maize. The subsidy on fertilizer,which is used mainly on commercial maize, has been reduced and is to be eliminated as soon as possible, but at least by the conclusion of the PFP. This will make an added contributionto efficient resource allocationin the sector. Although progress has been slow, research and extension are being strengthenedand redirected to serve more the needs of smallholdersand emergent farmers. These are all very positive measures. In a number of other important sectoral areas less progresshas been made and urgent actions are required. Collection of the maize crop, for instance, is a perennial problem which consistentlyresults in heavy crop losses and high costs. The annual last-minuteeffort to commandeerevery available truck for collecting the maize crop has proved to be ineffectiveand highly inefficient. Involving the private trucking sector in this task by full cost pricing and liberalizinghaulage charges is the obvious solutionto the problem: in the end the costs would be much lower. The procurementand distribution of fertilizer is haphazard,with the product often not  - 51 - ANNEX VI Page 5 of 9 available when needed. Many, perhaps most, smallholdersdo not have access to credit, and systems for ensuring repayment from those that do, are not effective. Despite some real increases included in this year's budget, research and extension, as well as other agriculturalservices, remain substantiallyunderfunded,and have been for years, with the result that the technical packages and servicesneeded by smallholdersare either inappropriateor not available. Uniform truck haulage charges countrywide prevent regional comparative advantage from dictating the patterns of agriculturalproduction, as it should. Lastly, but certainlynot least, development of the country's agriculturalexport potentialwill require the removal of restrictionson exporting. A forthcomingagriculturalsector report will expand on these issues, as well as others, such as land tenure, that are restraining the sector from reaching its growth potential. As regards industry, the adjustmentmeasures already taken by Government should go a long way towards improving the allocationof resources, reducing import dependence, stimulatingexports, and increasing efficiency and profitability. The key, however, to getting industrymoving is resuscitatingthe private sector through increased investment. To substantiallyimprove the business climate will require measures to reverse the impact of recent past controls and regulations. Private entrepreneurs must be convinced that their investmentsare safe and that they will be able to run their affairs with minimal interference. Identifyingand pursuing such actions should be at the top of the policy agenda. A review of the Investment Code is underway in response to concerns that it does not project a sufficientlypositive climate for both foreign and domestic  - 52 - ANNEX VI Page 6 of 9 investment. Capacity utilization in industrywould be assisted through imports purchased with balance of payments financing for the program. It is essential that industrialenterprises,private or parastatal, be economically,as well as financially,viable. As an important first step in this direction,the Governmenthas initiated a review of the trade system, including the tariff structure,to encourage firms to become more cost conscious and competitive. Parastatal efficiencyissues are especially important in Zambia. Experienceworldwide indicates that parastatalperformance generally suffers from the strong tendency to protect, subsidize and use parastatals for non-business-efficient purposes. Recognizing this, many governments are reducing the size and scope of their parastatal sectors through divestiture or other means, exposing parastatals to greater competitionand limiting their exclusive role to at most those sectors with strategic importance from either a social or political economy perspective. With efficiency and profitabilitythe goal, the Governmenthas initiated a review of the parastatal sector in Zambia. It will focus on the relationshipbetween ZIMCO, the parastatalholding company, and its subsidiariesand on an indepth study of selectedpoorly performing parastatals. The review is expected to recommend actions to restructure these entities, financially and organizationally. It is difficult to over- emphasize the importance of this review and the actions that need to be taken to rationalize the sector. The potential gains to the economy are substantial. Recruitment of consultantshas begun and financial support  -53 - ANNEX VI Page 7 of 9 for the review is needed. The governmenthas requested the Bank to supervise and administer this review. Zambia's mining industryhas been under considerablepressure recently on a number of fronts, including transport bottlenecks,inadequate skilled personnel, rapidly increasing input and productioncosts, large maintenance and rehabilitationrequirements,etc. It appears, at best, that production can only be maintained at present levels and may fall if some of the problems facing the industry are not corrected. Although lamentablydifficult to predict, there is at least consensus that copper prices will weaken significantlyduring the coming years. The industry's prospects do not appear promising,even for next year. Then there is the added specter of substantial exhaustionof reservesby the end of the decade. This situation suggests two imperatives:first, as a relatively high cost producer, Zambia is likely to have difficultycompetingwith other producers and must control costs; second, to avoid unnecessary shocks to the economy in the future as reservesbecome depleted, a phasedownplan needs to be prepared. ZCCM and the Government are taking actions to address these problems. The deterioratedstate of Zambia's transport infrastructureis exacting a heavy cost on the economy. There has been very little maintenance of the road and rail networks or vehicle fleets and inadequate capital replacement. Lack of spare parts has led to overinvestmentin company fleets which is a highly inefficientway of providing transport services. Consequently,a major objective of the adjustmentprogram is to  - 54 - ANNEX VI Page 8 of 9 restore balance in the transport systems to permit more efficient conduct of economic activity overall. The prioritiesare maintenance and rehabilitationof existing infrastructureand vehicle fleets, the adequate provision of spare parts, limited acquisitionof locomotivesand other transport vehicles, staff improvements (particularly Roads Department), at and improved planning and financial control, including the avoidance of direct or indirect subsidies. Removing the inefficiencies the delivery in of transport services is a singularlyimportant aspect of the adjustment program because of its broad ramificationsfor the economy. Improving social services, health, education,water supply, and gearing recovery to help alleviate poverty will be discussed later in this meeting. An especially important issue here is the need to increase and then maintain the level of recurrentbudgetary expenditureson the social sectors. While these sectors have been protected vis-a-vis other sectors in recent years, the levels of such expendituresare still significantly below what may be considered satisfactory. Significant real increaseswere effected in the 1990 budget and similar such increasesare needed in future budgets. As regards public expenditures,the Government initiated some reforms under the 1990 budget. As mentioned earlier, recurrent departmentalcharges were increased in real terms, inter alia, for the social sectors, agriculturalresearch and extension,and for road maintenance and rehabilitation. In the PIP, this initial "cut' at restricting public investmentsalong the lines of the criteria set out in  - 55 - ANNEX VI Page 9 of 9 the 1987 review of public expendituresis consideredthe first step in a process of public expenditure reform, which is to be broadened and deepened in the 1991 and subsequentbudgets. The challenge is to focus investments mainly on the priority sectors and, within these sectors, on the maintenance and rehabilitationof existing assets and the completionof economic ongoing projects. Only then would additionalhigh-priority/high return projects receive funding. We plan to continue to work intensively with the Government during coming months and years to improve further the structure of public expenditures. Thank you.  ANNEX VII -56- Page 1 of 5 Zambia - Fund Staff Statementfor ConsultativeGrou, Meeting Paris, April 9-11. 1990 It has been almost nine months since the last time we all met in this room to discuss Zambia'sadjustmentprogram and financingneeds. Since that time the Governmentof Zambia has not only perseveredwith the adjustmentstrategyset out in the policy frameworkpaper, the Government has gone beyond the effort envisioned in the PFP, taking stronger actionsup front and adoptingmore ambitiousobjectivesfor the 1990 program. of The cornerstone the adjustmentstrategyis the Government's to determination begin now the essentialprocess of diversifyingthe economy away from copper. In order to provide an environmentconducive of to investmentand growth and to ensure that the restructuring the economy will be effectiveand efficient,the Governmentis committedto curbing the budget deficit,bringingthe rate of inflationdown sharply, and letting price signals play a much greaterrole in the economy. Major steps toward these goals have alreadybeen taken. Both in their actions over recent months and in their program for 1990, the authoritieshave in-inporrantways acceleratedthe pace of adjustment comparedwith that set out in the PFP. In particular,they are moving more rapidlyon subsidies,on the exchangerate, and on trade than had been envisioned;they have set more ambitious liberalization objectivesfor inflation,the budget, and interestrates; and work has begun on designingthe parastataland tariff reforms.  ANNEX VII 57 - Page 2 of 5 The program for 1990 is set out in detail in the Government's memorandumof economicand financialpolicies,in the Fund staff report, and in the various documentsthat have been preparedfor this meeting. I will, therefore,focus my commentstoday on recent developments and policy actions in certain key areas. The rate of increasein the consumerprice index over the 12 months through December1989 was, at 154 percent,substantially higher than envisionedin the PFP. However,by the end of last year the annualized rate of inflationwas down to 60 percent,or less than half the annualizedrate recorded in the first part of 1989 when price controls were still in effect. In view of the progressmade on this front and, in particular,on monetarypolicy, the authorities have now targetedan inflationrate of 40 percent for 1990. The 12-monthrate of increasein the money supply has come down from 75 percent throughJune 1989, to 60 percent through December1989, and to 49 percent throughFebruary 1990. This progress in curbingmoney supply growth is due in large part to a very active monetarypolicy,as the Bank of Zambia took measures to absorb the liquiditycreated by continuedstrong copper prices and the Government'sfinancingneeds. Althoughthe budget deficitwas reduced significantlyin 1989 comparedto 1988, there was a worrisomeweakening of the fiscal position late last year and bank credit to the Government at the end of December1989 was 5 percent above target. The recent action to move all import duties to the second window exchangerate will make a major contributionto revenuesand may be sufficientto bring the budget on track. Nevertheless, the authoritieswill need to monitor the  -58- ANNEX VII Page 3 of 5 fiscal situationcarefullyand be preparedto take furtherdecisive action if necessary. While substantial policies, progresshas been made on macroeconomic two recent developmentsin the real economy give cause for concern: (1) as the result of transportproblems,the volume of copper shipments below program levels,and (2) owing to erratic is running significantly rains, the maize crop will be down sharply comparedwith 1989. Probably the most importantdevelopmentsince our meeting last July--and one in which I know there is wide interest--is the of introduction the second window exchangerate. This window is exporters, intendedto provide a strong incentiveto nontraditional encouragethe efficientuse of foreignexchangefor imports,and facilitatedonor flows. In opening the second window, the Bank of we in the initialOGL Zambia was--wisely, believe--cautious establishing list, althoughthe goal is to move fairly rapidly to a more generalOGL system. In the first weeks, supply exceededdemand by a substantial margin and, as intended,the authoritieshave recentlyadded more goods to the OGL list. Also, the Bank of Zambia has just recentlytaken measuresto make the export retentionsystem more furtheradministrative useful and attractiveto exporters. Fund and Bank staff attach great donor support for the importanceto the mobilizationof substantial second window and would hope that, both here and in the upcoming procurementmission,substantialprogresscan be made in addressingany local donor technicalproblems related to such disbursements; coordinationin Lusaka will also be essential. The Governmentof Zambia has indicatedthat, if possible, it would like to see the two exchange windows unified at a market-clearing rate before the mid-1992target  ANNEX VII Page 4 of 5 date set in the PFP; over recent months, the authoritieshave in fact been moving the officialexchangerate at a pace which the staff considerswould be consistentwith faster convergence. Zambia'sprogram for 1990 was reviewedby the ExecutiveBoard of the Fund on March 2. Directorsconcludedthat, except for the absence of adequatefinancingon appropriateterms, Zambia'spoliciesand objectivesmeet the standardsof upper credit tranchearrangementsand programs. The Governmentof Zambia has already taken a Fund-monitored series of politicallyvery difficultactions in the areas of price decontrol,subsidy reduction,and the exchangerate. With these actions in place, the program is now enteringa new--andperhaps even more that will requirenot big steps but, rather, challenging--phase determined day-by-day and week-by-week implementation. In support of these efforts the authoritiesare now seeking as the international assistance--technical, well as financial--from community. My colleague,Mr. Bornemann,reportedat the March 20 meeting on effortsbeing made in the Fund. The ExecutiveBoard is currentlyconsideringalternativemeans of addressingoutstanding of arrears to the Fund. One approach,the "accumulation rights,"has been generallyendorsedby our Board, althoughthe modalitiesremain to be determined. There is broad agreementon the need for a SupportGroup Group in this case. It is intendedand expectedthat the Consultative will serve as the vehicle for mobilizingexternalassistanceto Zambia. The SupportGroup would assess and coordinateprogress in putting togetherthe overall financingpackage and could also serve as a catalyst. Pending the formationof the Support Group, a working party of Fund ExecutiveDirectorshas met on several occasionsto discussthe  ANNEX VII - 60- Page 5 of 5 in financingrequirements this case and possibleproblemsthat could arise. I an sure we will be discussinglater in detail the revised financingrequirementstables that were circulatedlast week. As you will recall, the earlier tables indicateda 1990 financingrequirement of US$640 million before any paymentsto the Paris Club. With the new data, that number has been reviseddownward somewhatto US$605 million. To this needs to be added payments to the Paris Club; for example, payment of arrears and 1990 serviceon post-cutoffdate debt would add bringingus about another US$100 million to the financingrequirement, to the US$700 million indicatedin the revised tables. The Zambian Governmenthas set out to achieve no less than a and restructuring the economy. While completereorientation of of determinedimplementation firm policieswill be central,successwill depend also on the provisionof support from the international community. Such support will need to be not only adequate in amount but also made available on a timely basis and, in view of the medium-term outlook,on the most generousterms possible. While we recognizethat this will requirevery exceptionaleffortsby all parties,the Fund staff and management believe that the authorities' program merits that effort and that support.  - 61 - ANNEX VIII Page 1 of 3 ZAMBIA CONSULTATIVEGROUP MEETING Paris, April 9-11, 1990 Statement of Zambia'sPlans for Effective Programme Implementation Mr. Chairman, The Governmentwould like to strengthenits capacity to manage the implementationof its recovery and restructuringprogramme. Zambian experts have, since 1987, worked out our reform programme and helped steer its implementation.This has been at great strain on the few experts that of we have. For a smooth implementation the programme,we need a strengthenedtechnical team to collect, analyze and marshal all the necessary management information. Committee has A National Economic Monitoring and Implementation been establishedwith a mandate to ensure that the reform programme remains on course and I can assure that the reform programme is on course. The of Committee meets regularly to monitor the implementation the programme. However, it is clear that the amount of technicalwork necessary to facilitate the work of the Committee requires a back-up of additional experts, and depends on the strength of a strong and efficient full time secretariat capable of analising economic developmentspresent and for the future.  - 62 - ANNEX VIII Page 2 of 3 Our request for technical assistanceto this meeting is an attempt to provide additional support to key institutionsin the implementationof the reform programme.We will come up with technical assistanceneeds for other sectors. For the moment, we confine ourselves to the cores of economicmanagement in Zambia. We need two experts in statisticsto enable us obtain accurate and more up-to-date figures on the economy. Without figures of this kind, it is extremely difficult to monitor the performance of the economy. We also need, at least, one expert in each of the following fields: Macro-EconomicManagement, Planning and Budgeting, External Aid Coordinationand Debt Management. The terms of reference for each expert are given in the Public InvestmentProgramme. Zambia has contacted a few internationalinstitutionsin order to get some idea of the cost of the technical assistance. Responses show that the average cost per expert per year, with benefits, allowancesand all associated costs would run between US $100,000 and US $150,000, depending on seniority and experience. The six experts sought would, therefore, cost between US $600,000 and US $900,000per year. For the three years up to 1993, the total cost would range between US $1.8 million and US $2.7 million. The experts would primarily provide advice to selected Zambian personnel. The expert on external aid coordination,for example,would assist the Permanent Secretary (EconomicCooperation). He would primarily adivse him on a routine basis. The expert would, however, also work with  - 63 - ANNEX VIII Page 3 of 3 other officials on external aid coordinationand would liaise with other technical assistancepersonnel, as need arises. Mr. Chairman, during the course of this meeting, I have stressed the importanceof the Social Action Programme designed to cushion the impact of adjustmenton vulnerable groups in our society. Componentsof the Social Action Programme will, in general, fall on the relevantMinistry for execution. The health projects, for example,will fall on the Ministry of Health for implementation. The National EconomicMonitoring and ImplementationCommittee will receive reports from Ministries on the implementationof the Social Action Programme. Mr. Chairman, I have set forth briefly the Government'splans for effective programme implementation,including the technical assistance needs. My delegationwould be happy to receive comments of this meeting on the plans. We would, in particular,welcome a commitmentby a member country or organisationto fund the technical assistancepackage. Thank you.  - 64 - ANNEXIX Page 1 of 4 ZAMBIA CONSULTATIVEGROUP MEETING Paris, April 9-11, 1990 Social Action Programme (SAP) Statement by the Zambian Delegation Zambia has experiencedeconomic decline over the last fifteen years. This has resulted in drastic decline in households income. While the population and hence the labour force have grown, employmenthas declined, unemploymentand underemploymenthave risen significantly,real wages have fallen. Poverty and marginalisedhouseholdshave increasedboth in urban and rural areas. This state of affairs has resulted in the decline of real government revenue and has constrainedgovernment'sability to adequately fund social services. Social developmentindicatorssuch as health, nutrition and education have deteriorated. Social and economic infrastructurehas been dislocateddue to inadequatemaintenance and financial constraints. The heaviest burden of this increasingpoverty has fallen on the vulnerable groups such as the unemployed,women, youth and children. In order to reverse this situation a structuraladjustmentand policy reform programme has been put in place to acceleratethe recoveryof the economy, to promote economic growth, generate employmentopportunities and improve the welfare of the broad spectrumof the Zambian society. The policy measures that have been taken can only bear fruit after a  - 65 - ANNEX IX Page 2 of 4 considerabletime has lapsed. In the interim,these measures are likely to have negative impact on the low income unemployedand other vulnerable groups. To address these transitionalconcerns and to minimize poverty and hardships of the vulnerable groups until such a time that economic growth takes hold, the Governmenthas designed a Social Action Programme as an integral part of its structuraladjustmentprogramme. The success of the whole policy package will to a large extent depend on the support for the programme of the population as a whole. It is therefore important that cushioning the hardships experiencedby the vunerable groups in the transitionalperiod be taken into full account to ensure the survival of the programme. In short, this Social Action Programme brings the social dimension of structuraladjustment in the forefrontas an integralpart of the whole programme. We are proposing this programme fully aware that the lasting solution to the problem of poverty and destitutionof the vunerable groups lies in the achievement of sustained economic growth with equitable distribution. This is,however,a long term solution. In the interimwe need to provide social support measures to carry the populationwith us in the implementationof the programme. This support is vital for the survival of the whole policy reform programme.  - 66 - ANNEX IX Page 3 of 4 The Social Action Programme addresses the following sectors: (a) Health and Nutrition; (b) Education; (c) Water and sanitation,urban and rural roads, market places and transport; (d) Women and development; (e) Employment generationthrough public works projects to improve social and productived infrastructure;and (f) Development of small scale industriesfor self employment. The strategy of the Social Action Programme is (a) to promote and enhance employment and other income generatingactivitieswhile minimizing handouts. In this regard we have given priority to public works projects aimed at rehabilitationof existinghealth and educationalfacilities, water and sanitation improvementprojects and rehabilitation roads in of urban and rural areas and general public buildings. (b) to strenthen government implementationcapacity by effectivemonitoringof the programme and continuousperformance evaluation of all activitiesunder the programme and (c) to improve management capacity of implementingMinistriesby providing short-termmanagement trainingworkshops and seminars. The projects under each sector or subsectorhave been outlined in their order of priority. The estimatedcost for each project has been indicated. The foreign exchange needs as well as local costs have been identified and the financing gap of each project has been suggested in the  - 67 - ANNEX IX Page 4 of 4 summaries of Chapter VII of the PIP. The total outlay for the programme is around K7.8 billion or US$ 314.5 million as at December 1989 exchange rate. The implementingagency for each project has been identified. I would like to appeal to donors to support this very crucial programme. The success of the structuraladjustmenteffort will depend to some extent on the full participationand support of the Zambian population. This can only be assured if the hardships caused by the programme in the short run can be minimized by the appropriatemeasures proposed in the Social Action Programme. This programme can only be realised if adequate resources for its full implementation are assured.  - 68 - ANNEX X Page 1 of 4 CONSULTATIVEGROUP MEETING FOR ZAMBIA Paris April 9 - 11, 1990 Comments on the Social Action Programme (David de Ferranti, World Bank) The Government'sproposed Social Action Programme is an important step forward, aimed at mitigating the hardships experiencedby the poorest and most vulnerable groups during the transitionto sustained economic growth. Of particular significance are nine key elements of the Programme. First, the Programme is fully incorporatedin and integratedwith the overall economic recovery strategy. Thus, the proposed expenditureson the social dimension are includedwithin the Public InvestmentProgramme, rather than being separateadd-ons. Second, the Programme is action-oriented and substantial; it is not merely studies and small pilot efforts. The planned actions constitutea significantinvestment in the human factor in development. Third, the Programme is broad and multi-sectoral, with measures not only in health and education but also in water and sanitation,agricultureand nutrition,improvementof basic infrastructuresuch as roads and marketplaces,and employment generationthrough accelerationof public works and enterprise development. There is prominent emphasis on women, and there is stress on generatingwork opportunities -- genuine jobs on economically viable projects -- as a better answer to poverty than giving out subsidies. Many of the planned actions will have the combined benefits of (i) providing work and hence income to poor households, (ii) improving infrastructure vital for strengthening economic efficiencyand social services availabilityand quality, and (iii) raising worker productivitythrough capacity building. The goal is to help people help themselves,by empoweringthem to seek their own best solutions. In addition, the Programme has provisions relating to other priority concerns, including the need to accomodate growing numbers of unemployedyouth, the need to encourage more settlementin rural areas relative to urban centers, the need to help displaced copper workers find alternative employment.  - 69 - ANNEX X Page 2 of 4 - Fourth, the Programme emphasizes strengthening existing of institutions,rather than the creation of separate, parallel systems. It thus aims to strengthen,rather than fragment, efforts to nurture and improve capabilitiesin planning and implementation. - Fifth, due consideration has been given to the need to improve efficiency in existing programmes,and not just to expand support to them. - Sixth, the Programme provides not just a plan for addressing the current crisis but also a framework for the longer term improvementof the social sectors and human resource development. - Seventh, the Programme comes at a critical time in the economic reform process. As the economy has worsened over the past several years, the social sectors have deterioratedsignificantly. Reversing this trend cannot be delayed a moment longer. Eighth, steps are already being taken to implement the Programme. In the 1990 budget, for example, there are substantialincreases relative to previous years in the allocations for the social sectors,particularlythe health sector. (So, in answer to a question asked yesterday,yes Governmenthas begun, this year, to gradually bring back the social sector budget shares to more adequate levels.) = JNinth, while the proposed program quite appropriatelyis very action-oriented, also recognizesthe need for it expanded efforts to strengthenlocal capabilitiesto identify further actions to address the social dimension and mitigate poverty, and supports the improvementof the necessary data collectionand analysis capacitiesfor policy and program design and monitoring. Overall, the Programme offers a promising beginning. It builds upon and benefits from the experienceand expertise of the donors here today, some of whom have been active in Zambia for a long time, and it heeds the advice from that experience. The Government is clearly committed to the Programme. The crucial issue now is implmentation-- or getting from good intentionsto real, practical successes. The lessons from past efforts leave no doubt about how difficult the challengeswill be. Overcomingthese challenges will require a new level of resolve and follow-through from Government,a renewed degree of support and understandingfrom donors, and an effective partnership between Government and donors, and among donors. Doing this  - 70 - ANNEX X Page 3 of 4 well will demand from all of us -- in our different capacities,and as a team working together on a common problem -- a healthy realism about the possible pitfalls. Five considerationsare especiallyimportant in this regard. - First, a major effort will be required to avoid letting the programme become bogged down in inaction and indecision. Here it will be up to those in Governmentwho are responsiblefor implementingthe programme, from the highest levels down to the individualexecuting agencies, to sustain strong commitmentand cut through red tape. - Second, and related to this, the institutional responsibilities and arrangements will need to be spelled out carefully, and watched vigilantly. The current deficienciesin implementation capacitiesmust be taken into account, and a strong hand must be applied to correct any problems that arise. - Third, the regulatory,legal, and policy changes required to support the Programme,particularlyin regard to creating a better enabling environmentfor employment expansion, small scale enterprisedevelopmentand informal sector growth, will need to be introducedfully and rapidly. - Fourth, any activity under the programme that is not doing well will need to be attended to swiftly,and either set back on track or cut out of the programme so that the limited resources available can be utilized most productively. - Fifth, the necessary funding will need to get through the budget and disbursementprocesses and into the hands of those who need it without delay or uncertainty. In the weeks and months ahead, intensiveefforts will be required to address these issues, to work out the details of the activities to be supported under the Programme,and to mobilize action. The document that Governmenthas distributed recognizeshow much there is to do, and invites the suggestions and assistanceof interesteddonors. It expresses the hope that out of the deliberationsat this ConsultativeGroup Meeting will come a shared understandingof what the next steps need to be and how they will get done. In that regard, we must focus particularlyon keeping up the momentum of close collaborationand progress in the next few months, and until the next CG meeting. The mechanics for how to do that need to be considered during our discussions,and some agreement reached on the particulars.  - 71 - ANNEX X Page 4 of 4 In closing, the proposed Programme is a first step that will need to be followed up by many further steps if the goal of addressingthe needs of the poorest and most vulnerable groups is to be realized. It is not perfect, but it is a start. And all of us, including the millions of Zambians it seeks to help, have much to gain from moving forward now to make it work.  - 72 - ANNEX XI Attachment 1 Page 1 of 3 ZAMBIA CONSULTATIVEGROUP MEETING Paris, April 9-11, 1990 Zambia's External Debt Problem: A Statement by Hon. G.G. Chigaga SC, MCC, MP, Minister of Finance and National Commission for DevelopmentPlanning Mr. Chairman, Zambia debt stock at the end of 1989 stood at about US $7.2 billion. Given a population of about 7.5 million, the debt per capita is around US $950 compared to the income per capita of below US $290. Worse still, the country is accumulatingaround US $50 million per month on account of penalty interest charges. Clearly Zambia suffers from a debt overhang that requiresurgent solution. The debt stock of US $7.2 billion includes arrears of principal and interest of about US $3.8 billion includingUS $2.1 billion on long and medium debt and US $570 million on short-termdebt. About 44 percent of the debt stock is arrears of principal and interest. This is three times the expected export receipts in 1990 of just over US $1.0 billion. Arrears to the IMF and the World Bank are the largest amounting to US $1.2 billion as at the end of December 1989. To the IMF alone the arrears stood at US $979 million while those to the World Bank amounted to US $217 million.  - 73 - ANNEX XI Attachment 1 Page 2 of 3 Bilateral creditors' arrears totalled about US $846 million. Arrears on private debt and other multilateralinstitutionswere about US $775 million. The official bilateral debt stock at the end of 1989 was about US $2.7 billion, inclusive of arrears of US $846 million. Out of this, concessionalbilateral debt amounted to about US $995 million including accumulated interest arrears. Debt owing to the member states of the Organization for Economic Cooperation and Development (OECD) amounted to US $744 million. Three countries : Japan, the United States of America and the United Kingdom accounted for about 73 percent of total bilateral concessional debt. Concessionalbilateral debt owed to the non-OECD countries stood at US $251 million at the end of December 1989 with China accounting for 78 percent of the total. Non-concessionalbilateral debt stood at US $1.7 billion at the end of 1989, of which US $1.3. billion was owed to OECD countries and the balance to non-OECD creditors. Private debt, the bulk of which was made up of London Club debt, suppliers and export credits and short-termcommercial bank debt, amounted to US $1.7 billion. Mr. Chairman, Zambia has put in place an internationally acceptable economic reform programme for the period up to 1993. For this to succeed, it is important that the overall debt stock is reduced to a level that can be sustainedby the economy. We feel that this can only be  - 74- ANNEX XI Attachment 1 Page 3 of 3 achieved by going beyond the options which have so far been offered by the international community. Zambia would appreciate an early meeting of the Paris Club to consider ways of resolving the problem of bilateral debts. This would help to normalise Zambia's commercial relations with the donor countries and would open possibilities for the business community in Zambia to have access to international financing. The restructuring programme in Zambia requires this support for its successful implementation. In concluding my remarks I would like to appeal to multilateral financial institutions to examine all possibilities that may assist Zambia clear her arrears and reduce the debt stock to levels that can be sustained by resources available to the economy. I also wish, once again, to thank governments which have helped us through debt cancellation. I hope that other countries will consider taking similar action. Thank you.  - 75 - ANNEX XI Attachment2 Page 1 of 3 ZAMBIA CONSULTATIVEGROUP MEETING Paris, April 9-11, 1990 Addendum to the Statementby Hon. G. G. Chigaga As I have just said, the Government of Zambia is committed to pursuing our adjustmentprogram with resolve and vigour. But, as I am sure the donor community realizes, our ability to continue doing so is critically dependent on our external resource situation. The pressures and dimensions of our debt service burdens are unique in their relative magnitude. The Fund is, of course, our largest creditor. Our arrears to the IMF pose a formidablechallenge in getting us out of the impasse we seem to be confronting. I am fully aware of the sensitive discussionnow taking place in the Fund's board on dealing with the issue of arrears before agreement can be reached on the Fund's ninth quota increase. And I would not wish to pose issues which prejudice or influence those discussions. Yet, as a representative my country I am obliged to ask the of donor community to consider carefully the urgency of the predicamentwe face. We have already been making serious and severe adjustmentefforts for nearly 10 months now, without a clear idea of how we can work ourselves out of the debt trap we are in. Our external resource availabilityremains unclear and uncertain. I would therefore make the following appeal to you in our mutual best interests. Even as the IMF is engaged in deliberations  - 76 - ANNEX XI Attachment 2 Page 2 of 3 on the arrears problem, the rest of the multilateraland bilateral donor community should not use that as a reason, on grounds of precedent or principle, to delay action on their own programmesfor alleviatingour debt service burdens. Zambia does not wish to keep building up its already massive arrears. Nor do I believe that our creditorswish us to do so. The only way out therefore is to delink actions taken by: (i) the World Bank and by other multilateral creditors; (ii) by the Paris Club and by other bilateral donors; and (iii) by the London Club and private creditors, from actions which may eventuallybe taken by the Fund. I understandthe need for proper deliberationson the arrears issue by the Fund's board. But I do not understandwhy, or see any reason which justifies, Zambia -- in its presently desperate situation -- being put on hold by all other creditors until our arrears problem with the Fund are resolved. We commit ourselves to doing everythingpossible, within our economic and debt servicing capacity, to cooperatewith the Fund in finding a mutually acceptable solution along lines which the Fund's board may decide to establish. In a spirit of reciprocityI would hope that the donor and creditor community will, in the same spirit, commit itself to taking swift and urgent action to implement debt relief measures to the full extent that it is possible to consider. I would hope that the World Bank will proceed on its own front without any further delay to resolve issues and start relending to Zambia on the strengthof our adjustmentefforts. I would hope that bilateral donors can agree quickly to schedule a Paris Club meeting within the next two to three months. Because I fear that unless we see distinct progress being made on the debt relief front domestic  - 77 - ANNEX XI Attachment 2 Page 3 of 3 disappointmentand disaffectionmay mount even further and add to the difficultieswhich my Government already faces in pursuing sociallypainful measures. On this issue I ask, most sincerely,for your understandingand your commitment to avoid further delay in addressingthis critical question.  - 78 - ANNEX XII Page 1 of 5 ZAMBIA: CONSULTATIVEGROUP MEETING Paris, April 9-11, 1990 Debt, Arrears and Financial Requirements Statement by the World Bank Zambia's debt and arrears were discussed thoroughlyat the Pre- CG meeting in March. Briefly, as of the end of December, 1989, Zambia's total debt and arrears stood at about $7.2 billion, of which about $3.8 billion was principal and interest arrears. Total debt outstanding includingarrears was about $2.5 billion to the multilateral institutions,about $2.7 billion to bilateral institutions,about $0.7 billion in private long-term debt and about $1.4 billion in private short-termdebt. Of the approximately$3.8 billion in principal and interest arrears, about $1.3 billion was to the multilateralinstitutions,of which about $217 million was to the World Bank and $979 million to the IMF. At the Pre-CG it was noted that it was important to clear the arrears to the Bank and Fund to permit these institutionsto play the constructive roles needed of them in assisting Zambia to implement its reform program. The size of the arrears,however, presented a formidable  - 79 - ANNEX XII Page 2 of 5 problem. It was thought difficult for the donors to provide entirely the $1.3 billion needed to pay the arrears to the mulitlateralsand to contribute the financial support needed for imports and investmentsunder Zambia's program. It was recognizedthat existing policies in the Fund and Bank did not afford the flexibilityfor the institutionsthemselvesto deal with the arrears, although once the arrears were cleared the facilitiesof the institutionscould be available to Zambia, assuming satisfactory was being made. The donors urged the progress in program implementation Bank and Fund to explore new, additionalways to deal with multilateral arrears. These messages were conveyed and discussed extensivelywith the managements of the institutions. These deliberationshave not, to this point, resulted in a concensus among the shareholdersof the institutions on what should be done. In particular,decisions are requiredon both the modalities of the 'accumulatedrights" approach, as mentioned by Ms. Dillon of the Fund, and on sequentialversus simultaneousclearance of arrears between the Bank and Fund. The statement of external financing requirementscirculatedto you prior to this meeting assumes that the arrears to the multilateralsare cleared early in calendar 1991 and the funds required to accomplishthis are shown in the table. The requirementsafter debt relief are about $702 million in this year, 1990, and $1835 million in 1991. These calculations assume current account deficits in 1990 and 1991 of $220 million and $252 million, respectively.To this total is added scheduled debt service  - 80 - ANNEX XII Page 3 of 5 requirementsof $2850 million in 1990 and $1955 million in 1991.* Rescheduling of non-multilateraldebt is assumed using Toronto terms for Paris Club debt. Other non-multilateraldebt except for a small reduction assumed from debt buy-backs and swaps is shown as being rolled over. Two variations of this financing requirementsscenarioshould be mentioned. If an 'accumulationof rights" approach is agreed in the Fund and simultaneousclearance of arrears of the Fund and Bank are assumed, annual debt service to the Bank of about $70-75 million would have to be paid without any financial contributionfrom IDA. That is, IDA would not be able to disburse funds until the arrears to the Bank are cleared. This would place an additional financialburden on Government and the donors. Another variation would be if an "accumulationof rights" approachwere agreed in the Fund and sequentialclearance of arrears to the Bank and Fund was also agreed. In this circumstance,IDA would be able to begin disbursementsas soon as Bank arrears were cleared. As it becomes clearer which decisionswill be made it will be possible to prepare detailed financing projections for 1991 and beyond. The financial requirementstable also shows projected financing inflows, $350 million this year, and $1200 million in 1991. The entire amount in 1990 is from donor flows, partly assumed investmentflows and partly quick-disbursingflows from SPA. As you will recall, after consulting SPA donors, Zambia was declared eligible for SPA.  - 81 - ANNEX XII Page 4 of 5 For 1991, projected financing inflows assume a resumptionof IDA activity following the clearance of arrears. Access to the ESAF facility from the IMF is also assumed, again following the clearance of arrears. This is in addition to normal and SPA flows from the donors. There remain gaps of $352 million this year and $627 million in 1991 even after the assumed financing inflows. It is these amounts that highlight the present dilemma. Notwithstandingdonor flows at the level of the early 1980's, the highest period for Zambia, and relativelyhigh contributionsunder the SPA, there remains the need for roughly $1 billion this year and next. This amount is unlikely to come from any single source. Each institutionand donor will need to see what additional contribution it can make. Larger donor flows will be needed. More favorable reschedulingof Paris Club debt would help to some extent. The effects of reschedulingmoratorium interest,post-cut off arrears and post- cut off debt service are shown on the table as memorandum items. The medium-term perspective is brighter. I would like to call your attention to 1992 and 1993 on the table of external financing requirements. The financing gap in the base scenario turns positive in those years, by $287 million in 1992 and $307 million in 1993. This highlights the fact that if ways can be found to finance the gaps in 1990 and 1991, which are dominated by large accumulatedarrears, the financing requirementsbegin to appear much more feasible in subsequentyears. It also suggests that if the donors were able to front load their programs it T  - 82 - ANNEX XII Page 5 of 5 would ease the situation in 1990 and 1991 without causing difficultiesin terms of the availabilityof needed financing in 1992 and 1993. Much work remains to be done by the nations and institutions represented at this meeting. Most importantof this work is the successful implementationby the Governmentof Zambia of the structuralreform of its economy which is underway. Without a sound, well-implementedprogram the external financing envisaged simply will not be forthcoming. For the multilateral institutions,internal explorationmust continue on how best to assist Zambia's special needs for financingand for technical assistance. A major burden unavoidably falls on the donor countries. Bilateral aid programs will be essential for the resources to be found to help meet Zambia's financing gap. It is also the donors, through their ownership of the multilateral organizationswho must also seek ways for those organizationsto address the unusual problem of countries such as Zambia.  - 83 - ANNEX XIII Page 1 of 5 Speaking Notes for the Fund Representative at the Informal Pre-Consultative Group Meeting on Zambia Paris, March 20, 1990 1. Before turning to the specifics of the Zambia case, it might be useful to give you a brief summary of the progress that the Fund has made in applying the cooperativestrategy in the case of Zambia toward clearing its arrears to the multilateralinstitutions: - Medium-termpolicies have been formulatedand a Policy Framework Paper (PFP) has been endorsed by both the Bank and Fund Boards; - Economic policies for 1990 were reviewedand endorsed by the Fund Board on March 2 which, except for the absence of adequate financing on appropriateterms, has deemed those policies to meet the standardsof upper credit tranche programs; arrangementsand Fund-monitored - As you know, the World Bank has called a Consultative Group meeting for April 10-11, and this meeting will prepare the basis for a successful outcome. 2. of The financing requirements Zambia are large and complex and will need to be defined within a multiyear framework;all major creditors and donors (the Fund, the Bank, the Paris Club, the London Club, other official and private creditors,and the ConsultativeGroup) will need to make extraordinaryefforts to help meet these requirements; this may involve actions beyond those permitted by their current policies.  - 84 - ANNEX XIII Page 2 of 5 3. The financing needs for Zambia set out in the Fund staff report are as follows: - To provide for Zambia's import requirements,while freezing arrears to multilaterals the end-1989 level, the financing at need will be about $640 million for 1990 and about $1.8 bil- lion for 1991, includingamounts to clear arrears to the multilateralfinancial institutions(MFIs). - In an illustrative scenario set out in the staff report, it has been assumed that all arrears to multilateralinstitutions would be cleared in early 1991. This would be based on a Fund-monitoredprogram of about one year covering calendar year 1990. Needless to stress that this would be an extremely difficult task. - The amount required to clear arrears would be about $980 mil- lion for the Fund and $220 million for the World Bank, and an additional amount of about $100 million for other multilateral financial institutions. 4. Over the past two years, the Fund has developed a set of policies and procedures--thecooperativestrategy--todeal effectively with the problem of overdue obligationsto the Fund and, more broadly, arrears to the MFIs. ExecutiveDirectors in the Fund have been dis- cussing during the past two months various approachesto strengthenthis cooperative strategy,especially in cases of large protractedoverdue obligations such as Zambia. While discussionshave not been concluded, there seems to be an emerging consensus. In particular,Executive Directors have generally endorsed the concept of a "rights" approach,  - 85 - ANNEX XIII Page 3 of 5 under which a member currentlyhaving protractedarrears could accumulate "rights," conditionedon performanceduring the period of a Fund-monitoredprogram, toward a future disbursementonce its arrears programs had been cleared and a new program agreed. Such Fund-monitored would generally span a period of about three years, with the possibility of variation in either direction dependingon the particularcircum- at stances of each member. The disbursement the end of the Fund- monitored program could be up to the equivalentof arrears outstanding at the outset of the program. 5. While the "rights"approach could address overdue obligations to the Fund outstandingat the beginning of a Fund-monitoredprogram, resources would still be requiredto meet the members' financingneeds during the program, including its obligationsfalling due to the multi- lateral institutions. Beyond covering the import and other direct financing requirementsof the economic program,Zambia would--withits own resources and the assistanceof the ConsultativeGroup--be expected to make maximum efforts to meet obligationsfalling due to the multi- laterals; in this connection,it should be stressed that the financing that needs to be raised by the ConsultativeGroup for the year 1990 is the same under either the illustrativeapproach outlined in the Fund staff report, or under the "rights"approach currentlybeing finalized in the Fund. No decision at the Fund has been taken as yet on which of of these two approaches is better suited to the circumstances Zambia. 6. Preliminarydiscussionshave taken place in the Fund regarding the formation of a Support Group for Zambia, and there is broad agree- ment on the need for a Support Group in this case; some countrieshave  - 86 - ANNEX XIII Page 4 of 5 already indicated their intentionto participate;others are in the process of considering in capitals, but with early positive signals already given. - The Support Group would serve as a forum to deal with fi- nancing issues that cut across the purviewsof the individual sources of such financing;the usual channelsof coordination and cooperationbetween the various parties involvedwould, of course, be employed to their fullest. The Support Group, however, could be effective in encouragingthe various parties to go beyond these normal channels,when it is necessary. - The Support Group would be mainly a catalyst that would com- plement, not supplant,the functionsof the other concerned institutionsand fora; for example,the ConsultativeGroup would continue to serve as the forum for the mobilizationand coordinationof economic assistance. 7. Until the Support Group is formed and determinesfor itself the modalities of its operation,a working group of ExecutiveDirectors within the Fund will continue to meet periodicallyto assess progress being made and problems that arise, and through timely reporting to their national authorities,to help the resolutionof such problems where possible. The Support Group, when formed, would decide whether such a working group should continue. Any such group could draw on the staff of the World Bank and the Fund for technicalassistance,as needed.  - 87 - ANNEX XIII Page 5 of 5 8. Based on a recent tour d'horizonmeeting of the Paris Club, it appears that the Paris Club might be prepared to extend quite comprehen- sive and generous debt reschedulingto Zambia. Of course, there are a number of issues that remain to be settled,includingwhat would be acceptable in the way of a Fund role as a basis for rescheduling. Also, most participantsappear to be preparedto ensure that commitmentsand disbursementscan proceed through the ConsultativeGroup prior to a formal multilateralrescheduling. 9. My colleague,Ms. Dillon, will give you later this afternoon a brief overview of Zambia's structuraladjustmentprogram,the latest developments since the staff report was issued, and Zambia's financing requirements. Of course, we will be prepared to answer any questions you may have on the Fund's arrears strategyand on issues related to Zambia's structuraladjustmentprogram.  - 88 - ANNEX XIV Page 1 of 3 ZAMBIA CONSULTATIIVEGROUP MEETING Paris, April 9-11, 1990 Closing Remarks by the Hon. G. G. Chigaga, SC, MCC, MP Minister of Finance and National Commissionfor DevelopmentPlanning Thank You Mr. Chairman: Let me first of all express my most profound gratitude for the excellent manner in which you directed our deliberationsover the past three days. Your candid and able guidance has undoubtedlybeen the force behind the constructivemood of the meeting. I wish also to thank all the delegationsfor your useful contributionsto the meeting, your understandingof my country's difficult economic situation and your willingness to assist us in our continued search for a solution. As it has been shown, the financingneeds for the success of the programme are such that they require the full participation of the donor community. In this regard, I am grateful to those countries that have been able to make concretepledges of financial support to the reform programme which my governmenthas put in place. I would like to appeal to those of you who have not been in a position to indicate specific financial support for the programme, to try and do so in the very near future. This is very important because the timely flow of funds is crucial for the successfulimplementationof the programme. We have also taken  - 89 - ANNEX XIV Page 2 of 3 note with concern that the actual disbursementsof most of the funds under these pledges will depend on the solutionto arrears to both the Fund and World Bank. We therefore appeal to both these institutionsto hasten the process of resolving this issue. On our part we shall follow up these pledges so that quick-disbursingfunds can start flowing immediately. With regard to the broad issues of outstandingdebt and especially arrears, it is imperativefor creditor countries and institutionsto come up with solutions compatiblewith my country's current difficult economic situation. The solution of my country's debt situation will therefore need special treatment and a great deal of flexibility. A well-structureddebt plan that can reduce our debt obligationsin the coming years is a necessary condition for the resumptionof resource flows needed to support our adjustment efforts. My governmentis therefore grateful to those countries that, in recognitionof this, have written off debt owed to them. I hope that other countrieswill consider taking similar action. As I mentioned yesterday,my country would appreciateif governments representedhere could facilitatean early meeting of the Paris Club to consider ways of resolving the problem of bilateral debts. We consider the normalisationof relationswith the donor community and the resumption of internationalfinancial flows as a necessary pre-requisite for the success of the programme.  - 90 - ANNEX XIV Page 3 of 3 Finally, I wish to reassurethe donor community of my Government's commitment to the programme that we have adopted. We have already demonstratedthe determinationto uphold all the measureswe have taken in the recent past. All comments and concerns expressed around the table on various issues will be addressed to improve the quality of the programme. Once again I wish to thank you all most sincerely.  - 91 - ANNEX XV Page 1 of 8 ZAMBIA CONSULTATIVEGROUP MEETING Paris, April 9-11, 1990 Chairman'sClosing Remarks Ladies and Gentlemen: The time has now come to adjourn our deliberations;but before we disperse, allow me to highlight briefly the key outcomes and next steps. When we started our discussionon Monday afternoon,we faced a formidable agenda, which clearly linked the content and financing of the reform program. We all recognize that the evolution and sustainabilityof Zambia's adjustment program demand that governmentand donors alike strengthen their efforts to remove the continuingimpedimentsto reform and growth. We also recognize that adequate financing of the program requires viable solutions to Zambia's debt and arrears problem within the broad framework of internationalcooperation. Our discussionson these issues were frank and wide ranging. There is clear and general agreement that the content and direction of the reform program in Zambia is substantivelyappropriateand moving in the right direction. The meeting endorsed the policy actions which the Government of Zambia has taken since last June to stabilizethe economy and to lay the foundationfor economic revival. These measures have been difficult, and participantscommended the Government for taking key steps in advance of the time frame indicated in the Policy Framework Paper. A turnaround in economicperformance demands that progress in  - 92 - ANNEX XV Page 2 of 8 reform is maintained; and we all welcome the message of H.E. President Kaunda, and the detailed assurancesof Minister Chigaga and his colleagues that the Government of Zambia is determinednot only to maintain the current pace of adjustment but also to broaden the program as necessary to respond to evolving circumstancesand implementationexperience. Our discussionsconcerning the reform program have focussed on five key areas where strengthenedmeasures will be required for the success of medium-term adjustment and restructuring. First, the role of parastatals receivedwidespread attention. Participants stressed the need to complete reviews of the sector quickly and move directly to implementmeasures to streamlinethe parastatal sector in order to limit its claim on scarce resources and ensure that remaining parastatal activities are conducted on a commercialand economicallyviable basis. Privatizationof parastatals that could function in a competitive environment and closing down non-viableparastataloperationswere widely emphasized as key elements in a credible strategy to economizeboth scarce financial and management resources. Reduction in the scope of the parastatal sector would send an importantpositive signal to both donors and the private sector. Second, urgently needed measures to diversify and restructure the economy have been strongly linked with increasingand effective participationof the private sector throughout the economy. Suggested measures have ranged from streamlinedproceduresand enhanced incentives  - 93 - ANNEX XV Page 3 of 8 governing both private domestic and foreign investmentto systematic elimination of obstacles to the fuller participationin the economy of small-scale enterprises and the informal sector. Successful diversificationwould require not only the rapid growth of non-traditional exports but also the reduction of the excessive import intensity of the Zambia economy. This in turn would depend significantlyon a greater role for the informal sector. Third, participantsfocussed considerableattention on the public investmentprogram. Key issues in this context include the consistency of investmentprogram with recurrentbudget allocations;the overall magnitude of investment,in the light of resourceconstraintsand private sector requirements;the appropriatemix of new investmentsversus rehabilitationand completionof on-going projects; and finally, the capacity of government to implement the PIP. This latter point linked closely to a broader concern with public sector management and the increased demands on limited domestic capacity resulting from the broad- based reform efforts. Local capacity buildingwill only stem from strengthenedtraining and an institutionaland incentive environmentmore conducive to retaining personnel. Participantsurged continued efforts to trim the size of the civil serviceswhile improving incentivesfor retained staff. Technical assistancewill be important in augmentingand building local economic management capacities;but the costs and well-known pitfalls of technical assistancewill require a carefully structuredand carefully monitored approach. Several donors indicated their willingness to step up their support in this area.  ANNEX XV Page 4 of 8 A fourth theme of our discussionson the content of reforms centered on the Social Action Program. Participantswelcomed the proposals put forward in the documentationbut stressed that concrete implementation proposals -- the "how, when, and where" -- would have to follow. Continued increases in funding priority social sector programs to restore real expenditure levels will be essential to demonstratethe Government'sown commitment to the success of the SAP. But funding alone will not suffice. Measures to identify and redress institutional shortcomingswill be essential to ensure that Zambia's adjustmentefforts incorporate a pro-active approach to poverty alleviationand improved social outcomes. Participantswelcomed the intention of governmentto come forward with concrete implementation plans and proposals within coming weeks. A final theme which cuts across virtually all the topics discussed these past two days is the need to promote an environmentof broader and more effective participationin the developmentprocess. This required action on micro-level development,further steps towards decentralization,and enhanced community participation. Participantsnoted the need to create an enabling environmentto offer real incentivesto attract, retain and effectivelyutilize the services of trained Zambians at all levels; but especially in the professionaland entrepreneurialcadres where so much underutilizedpotential exists.  ANNEX XV Page 5 of 8 Let me now turn to the critical issues of financing the program. Before tackling the complexitiesstemmingfrom Zambia's debt and arrears, I would like to emphasize that the need for extraordinarydonor support to Zambia's financing requirementsunder the current year's program has been universally recognized. Your indicationsof assistancetotalling $200 million in investment support and $250 million in fast disbursing,SPA support for 1990 would allow the governmentto implement its reform program as long as the conditions for the utilization of these commitmentsare met in a timely manner. The key condition for this support is an effectively monitored and sustained reform program. About half the total support is also conditional on a resolutionof the multilateralarrears problem and an early Paris Club agreement. The CG, through the additionalsupport committedby the bilateral donors at this meeting, has made excellent progress toward filling the gap for 1990. In effect, about 30Z of the 1990 base scenario financing gap of $352 million has been closed, provided that the stated conditions are met. This is an importantachievementand representsa major step forward for the Zambia program. The next steps require the donors in their various capacities as shareholdersin the multilateral institutionsand participantsin the Paris Club to work toward fulfilling the conditions that will release the bulk of these resources. Additional efforts by donor governments acting individuallyand through these institutionswill be required to complete the funding program. It will also be essential for donors to work closely with Zambian authorities to ensure that these indicationstranslate into rapid  - 96 - XXV Page 6 of 8 disbursementsunder the existing and improvedmechanisms for BOP support. The upcoming joint Bank/donorprocurementmission to identify actions to simplify and harmonize procedureswill be especiallyimportant in this context. Beyond this participantshighlighted the need for stronger local donor coordinationunder Zambian leadership,preferablyon a sectoral basis. Participantsalso solicited and received the assurancesof Zambian authorities that the first claim on donor resourceswould continue to be the ex ante resource gap as indicated in the Fund-monitored program. Turning now to the linkages between these very positive indications of donor support and the intricateand evolving approachesto Zambia's debt and arrears, let me list several key points that have emerged in the course of participant statementson financing,debt, and arrears, recognizingthat Zambia has in effect become the test case for institutionalissues which will require resolutionoutside the context of this ConsultativeGroup: (i) Participantsstressed the extreme urgency of a decision on the "accumulatedrights" approach to IMF arrears and on outstanding issues blocking its implementation. (ii) Participantsattached equal urgency to a decision of donors, acting in their capacity as shareholdersof the Fund and Bank to allow sequentialclearance of arrears to the two institutions. This would clear the way for an  - 97 - ANNEX XV Page 7 of 8 early and welcome resumptionof IDA participationin the program, by providing Zambia access to IDA 9. (iii) In anticipationof these developments,participantsurged Bank staff to consider innovativeand fresh approaches, linked to Zambia's particularcircumstances,to frontload IDA commitmentsand accelerateIDA disbursementsto the maximum extent possible in view of the substantialgaps in the first years of the program. Participantssuggested that this include restructuringundisbursedbalances on outstanding IDA credits. The Chair notes however that IDA cannot clear or refinanceWorld Bank arrears. The question is rather how IDA can make an optimum and timely contributionto financing the program, recognizing,inter alia, the need for equitable and fair treatment of all IDA recipients. Indicationsof donor support to mechanisms such as the "5th dimension'to assist Zambia to meet its on-going debt service obligationsare extremelywelcome. (iv) Participantsalso urged the Fund to seek new approachesto deal with IMF annual charges during an "accumulationof rights' period. In view of the continuinguncertaintieswith regard to the financing of the program and the resolutionof the multilateralarrears problem, we have agreed that the CG be prepared to reconvenewithin 2-3  - 98 - ANNEX XV Page 8 of 8 months to reassess the situation. A revised financingplan would be tabled at that time reflectingboth updated balance of payments informationand decisions taken by donors and shareholdersof the IMF and World Bank. In closing, I would like to thank each of you for the personal efforts you have made and the efforts your governmentsand institutions have made to support the efforts of Zambia's own people and governmentto restore the prospect of economic viability. I know I speak for all donor participants in recognizing the sincere commitmentand full involvementof Hon. Chigaga and his colleaguesnot only in respondingto the specific issues raised in our meeting but in their continuing, intensive efforts to implement the Government'sprogram. Finally I would like to thank the translatorsand support staff for their excellent contributionto the smooth running of these proceedings. I wish you a safe return and look forward to an early resumption of these consultations.  - 99 - ANNEX XVI World Baoank d'lina. 75116 PARIS.France- Telephone:(1140 69 30 00 EuropeanOffice: 66. invenue Page 1 of 2H PRESS RELEASE For Immediate Publication CONSULTATIVE GROUP COMMENDS ZAMBIA FOR ECONOMIC REFORM PROGRAM PARIS, April 11, 1990 -- A meeting of the Consultative Group for Zambia was held in Paris on April 9, 10 and 11, 1990 under the Chairmanship of Mr. Sven Sandstrom, Director, Southern Africa Department of the World Bank. The Zambian delegation was led by the Honorable Gibson G. Chigaga, Minister of Finance and National Commission for Development Planning, and included the Honorable E. M. H. Haimbe, Minister of Power, Transport and Communications and other high-level Government officials. The Consultative Group reviewed Zambia's adjustment program and noted with satisfaction the progress achieved so far in laying the foundations for structural change and a restoration of economic growth. The Group commended the government on the difficult measures already taken, including the decontrol of prices, lowering of subsidies, exchange rate adjustments, and monetary and fiscal measures to reduce inflation. It was noted that these measures were already beginning to show positive results in the economy. In particular, delegates were pleased to see a reduction in inflation and the beginning of growth of non-traditional exports. The Group stressed the importance of continued strong commitment by Zambia to the adjustment program. The donor representatives were gratified to see implementation ahead of schedule in many respects, which was seen as strong evidence of the government's commitment to the program. Implementation capacity was a cause of concern, because of the comprehensiveness and complexity of the adjustment program. Strong support was expressed for the technical assistance program that had been agreed upon to buttress the government's implementation capacity. The government's plans to improve public sector management through civil service reform were well received at the meeting. Delegations welcomed the government's concern with social actions needed to alleviate hardships and ensure that the vulnerable groups participate in and benefit from the adjustment program. Of particular concern in this regard was the low, albeit rising, level of funding in the health and education sectors. Although pleased with the progress already achieved on the program, the Group identified a number of areas requiring priority attention. These included streamlining the parastatal sector to ensure that its activities are, and remain, economically viable. It was thought essential that the parastatals contribute to national resources, rather than consume them. Delegations emphasized the importance of actions to  - 100 - ANNEX XVI Page 2 of 2 encourage wider participationof the private sector in the economy to achieve increased investmentand growth. The informaland small-scale industry sectors particularlyafford significantemploymentand income potential. It was agreed that Zambia does not have the capacity to generate the resources required to meet scheduled debt-servicefully, let alone pay the large arrears that have accumulatedover the past several years. Extraordinarydebt relief was required. There was an extensive discussion of Zambia's arrears to the multilateralinstitutions, which account for about one-third of the US $3.8 billion of total arrears. The meeting recognised that this problem would have to be addressed outside the ConsultativeGroup framework and the meeting called upon those institutions and governments in a position to influence a solution to the matter to take urgent action to do so. Good progress was made towards closing the financial gap. Financial support indicatedfor 1990, about US $ 450 million, exceeded the total received by Zambia in any comparableperiod in the past. This of support was based on the continued and firm implementation the adjustmentprogram and much of it conditionalon debt rescheduling and on completion of the financing package. The participantsrecognized that completionof the financing package would require further discussion and resolution of the debt issue. The Group members agreed to meet again later this year and to organise, in the meantime, the appropriatesectoral of coordinationframework in order to assist implementation the program in Lusaka. The meeting was attendedby delegations from Canada, Denmark, Finland, France, the Federal Republic of Germany, Ireland, Italy, Japan, the Netherlands,Norway, Sweden, Switzerland,the United Kingdom, the United States, the African DevelopmentBank, the Commissionof the European Communities, the European InvestmentBank, the International Monetary Fund, the Opec Fund for InternationalDevelopment,the United Nations Children's Fund, and the United Nations DevelopmentProgram. Observers from the Arab Bank for Economic Development in Africa, the Food and Agricultural Organizationand the Organizationfor EconomicCooperationand Development were also present.  - 101 - ANNEX XVII Attachment 1 Page 1 of 2 Statementsby Donor Delegations* ZAMBIA CONSULTATIVEGROUP MEETING Paris, April 9-11, 1990 Opening Statement by Fred C. Fischer Head of the U.S. Delegation The U.S. is pleased that Zambia has been able to reach broad agreement with the Bank and the Fund on a new reform program to stabilize and restructure the economy. The U.S. Governmentbelieves that the new policies reflected in the PFP (and the new prioritiesreflected in the PIP) are on track. If the new program is fully implemented (and if it is backed by sufficient resources from the donors, then Zambia stands a fair chance, perhaps its last chance, to embark on a long-termpath of self-sustaining growth. The program will be painful and calls for extraordinaryefforts by the donors, and most of all, by Zambia itself. * These are the statementswhich were distributed to the Consultative Group by the representatives various donors. Other delegations of who made their interventionsdid not provide texts of their speeches for distribution. The statementshave not been edited in anyway other than for grammaticalerrors.  - 102 - ANNEX XVII Attachment 1 Page 2 of 2 We accept the Government'sstatementsof its commitmentto the new reform program. But we are concerned about the degree of commitmentin one very important aspect of the new program, and that is the opening up of the economy to greater private sector participation. What it comes down to is the need for a philosophicalchange in attitudesby Government officials, many of whom have refused to accept the notion that the private sector can and must be the main engine of economic growth. In this regard, we believe it is critical that the Government move rapidly to restructureand, wherever feasible,privatize parastatal activities, particularly in the manufacturingsector. Forthrightaction by the Government on parastatal reform would be one way to give a very positive signal to potential investors,both domestic and foreign, that both the Government'spolicies and its attitudes toward the private sector have changed. In the final analysis, Zambia'snew economicprogram will fail if it does not stimulate sustainablenew private investmentand private sector activity. If the internationaldonor community is willing to revise the rules of the debt management game in order to assist Zambia, then Zambia must revise its attitude toward the pervasive role that parastatalsplay in the economy.  - 103 - ANNEX XVII Attachment 2 Page 1 of 6 ZAMBIA CONSULTATIVEGROUP MEETING Paris, April 9-11, 1990 Statement by the Norwegian Delegation In line with previous speakersI would like to thank the head of the Zambian delegation,the World Bank and the InternationalMonetary Fund for the informative statementsgiven this morning and for the documentation to this meeting. Both their statementsand the documentsunderline the severity of the situation and the challengesthe Governmentof Zambia is facing. The reports to this meeting show that Zambia may now be on the right track in its adjustmentpolicies. The policy measures announced represent a bold attempt to address fundamentalsof the Zambian economy. The documents do, however, also reveal shortcomingsthat may impede prospects. I will briefly comment on a few of these. Also I may mention that the expectationsof resources both for a satisfactorysolutionto Zambia's debt problem and for continued investmentsin developemnton the present level seem overly optimistic. During 1989 Zambia has to some degree succeeded in correcting the course of its economy. The tempo of adjustmentis in certain respects, as e.g. exchange rate adjustment,even higher than envisaged in PFP. This demonstratesa serious determinationto deal with basic problemswhich  - 104 - ANNEX XVII Attachment 2 Page 2 of 6 should be commended. However, going too fast may create extra inflationary pressure and one should take care that measures taken to deal with this problem do not harm production investmentand private business' need for credit. Mr. Chairman, We are somewhat concerned about the present restructuringand development programme's focus on a relativelyheavy export-oriented economy. We think it is legitimateto ask whether it is realistic in the future to count on a large-scalecurrency earning potential as future substitute for copper forex earnings. For example, it is only realistic to assume that future mineral productionwill be as vulnerable to fluctuatingworld market prices as copper, and that agriculturalexport will be regularly restrictedby adverse weather conditions and heavy competitionin regional as well as overseas markets. Of course we would not suggest that Zambia should not fully exploit its export potential. However it is important that this potential is realisticallyassessed and that Zambia's forex needs do not lead to the establishingof an external sector that is not sustainable.  - 105 - ANNEX XVII Attachment 2 Page 3 of 6 A strategy to manage with less forex for importswill imply priority to fueling the undergrowthof artisan and small industry activity in the fomal and informal sectors. This should inter alia, meet some of the needs of import dependent industries,thereby lowering their expenditureson imported spare parts and raw materials and the overall dependency of imports of manufacturedgoods. Such a strategy should also include more incentives for domestic productionof basic foodstuffsto meet as much as possible of food demand domestically. A more self-containedand thus less vulnerable economy of course presupposes that basic solutions to Zambia's debt problem can be found, that arrears are dealt with, that the total debt burden is substantially reduced and that the remaining long and medium term debt is rescheduledto concessional conditions on a long-term sustainablelevel. These are heroic presuppositions,but we see few alternativesif Zambia shall in the future have any possibility to fulfill its developmentobjectives. We are aware that both the Bank and the Fund are exploring new ways of solving these problems. They carry a great responsibilityin this respect, as we believe that their very credibility as development institutionsis at stake. Unprecedentedand innovative solutionswill need to be found as stated in one of the World Bank's documents. Whichever strategy is chosen a need exists to scrutinizethe cost-structureof all public activity to gain better budget balance. There is a clear need to go through the entire portfolio of public activities  - 106 - ANNEX XVII Attachment 2 Page 4 of 6 presently covered by the Government itself and parastatals to determine which public sectors can sustain budget cuts without serious consequences for the society and which functions can be as well or better undertakenby the private sector. It seems that a large potential for cost cuts exists within the parastatal sector. It is of course up to the Zambian Government to set prioritieswithin the available resources. Allow me, however, to express the hope that the Zambian Government, in view of the emerging prospects for more peace and stabilityin the region, will find it possible also to consider cuts in the defence budget. There are, however, two sectors which we hope will be protected from additionalbudget cuts, that is education and health. Budget allocations for these sectors are already cut down to the base minimum. Their share of total resourcesmust graduallybe increased. Quite as important as cutting costs is the income side of the budget. The Zambian Governmentmust find new income possibilities. Extension of the income and company taxationbasis may be a very viable alternative. This should include also the copper sector, whose contribution to the Government revenue over the last few years has been of surprisinglymodest. The introduction VAT-like taxes may be contemplated. May I also add that we have noted with some surprisethat the Zambian Governmenthas in the present situation found it possible and advisable to reduce import levies on luxury goods.  - 107 - ANNEX XVII Attachment 2 Page 5 of 6 The Public InvestmentProgramme should ideally present a strategic view of the roles of different sectors in the future Zambian economy and should give clear priorities and indicationson a reasonable scale of what resources are needed to implement the programme. The PIP which we have received in advance of this meeting is a good first draft of such a document, but leaves much work to be done. We question the size of the programme both in relation to the size of the Zambian economy and its inflation inducingeffects, and in relation to a realistic assessmentof available domestic and external resources. The PIP, as presented, is based on an extensiveuse of imported resources, and it lacks considerationson its recurrent cost and operational implications. A better alignment of clearer priorities of the PIP wih private sector needs seems to be called for. We must inter alia, ask whether the programme will occupy too much of the resources available and leave too little for the private sector. This issue should be especially topical on the background of the dominating and rather unsuccessfulrole parastatal monopolies have played in the Zambian economy so far. We agree with the PIP-documentthat the opportunitycost of foreign exchange is extremely high. The PIP therefore says that every effort has been made to conserve on the use of this scarce resourcewhen setting investment priority. However, when more than 65Z of the planned  - 108 - ANNEX XVII Attachment 2 Page 6 of 6 investment is to be imported,we have difficultiesin seeing that we have succeeded in this aspect. This may have serious implicationsfor future import dependency as well. A programme with dimensions like the present or a revised PFP presupposes a very efficient implementation mechanism. We are therefore worried that the capacity and motivation of Zambia's administration may not be adequate. Plans for reforms of the civil services, including improved salary structure to induce experiencedpersonnel to remain in government service, are urgently needed. Similarly,a strategy for general strengtheningof core institutionsfor programme implementationis required. Technical assistancewill be needed as part of such a strategy. The task of bringing the Zambian economy back on its feet seems almost insurmountable. On top of other problems the crisis has come in a time when competition for development resources,because of the situation in Eastern Europe, is tougher than ever. Austerity and realism in restructuringplans are therefore more than ever called for. Also consistency in and wholeheartedpursuance of the agreed on restructuring policies is a prerequisite for continued donor support of such programs.  - 109 - ANNEX XVII Attachment 3 Page 1 of 6 CONSULTATIVEGROUP MEETING FOR ZAMBIA Paris, April 9-11, 1990 Statement by the Delegation of the Federal Republic of Germany Mr. Chairman, The presence of the Honorable Minister of Finance, and of an eminent delegation from Zambia and the broad attendanceof bilateral and multilateral donors as well as multilateralfinancial institutions underline the significancewhich is attached to this ConsultativeGroup Meeting for Zambia. And expectationsare high of our consultationshere in Paris. The discussionyesterday has proved that the trust among ourselves which has built up in our meetings on Zambia's developmentprospects and on our commitment form undoubtedly an excellent basis for dealing frankly and in partnership with the more controversialitems as well. Mr. Chairman, first I should like to thank you and your staff for preparing this consultativegroup so well and for the discussionon the 20 of March which did a lot towards facilitatingour preparationsfor this meeting. The informativeand comprehensivereportswhich were sent to us reflect the intensive consultativeprocess between the Zambian Government and the Bretton Woods institutionsas well as the donor community. The complexity of the problems made it necessary to conduct a number of investigationsprior to this consultativegroup. And the fact that the  - 110 - Attachment XVII Attachment 2 Page 2 of 6 public investmentprogramme and the correspondingsector analyses are on the table shows what enormous efforts the main institutionsinvolvedhave made to broaden the analytic base of the adjustmentprogramme at an early stage with a view to an integratedand multi-dimensionalapproach to structural reform. Nevertheless,Mr. Chairman, there are still a lot of open crucial questions especiallywith respect to the PIP and PEP. Since the middle of last year the Zambian Governmenthas made a number of important corrections to its economicpolicy, displaying remarkable determination. These are set out clearly in the documents before us and were further explained to us yesterday afternoon and this morning. The adjustment strategywhich the Zambian Governmenthas drawn up on the basis of the 4th National DevelopmentPlan and tackled in collaborationwith the World Bank and the IMF meets with our full support in respect of its objectivesand future shape. We also welcome the higher priority given to the social dimensionsof the adjustmentprocess by comparisonwith previous reform programmes. We are firmly convinced that, in the final analysis, economic recovery and sustainability the growth of process, coupled with a more even distributionof income, are still the best strategy for fighting poverty and degrading living conditions. Mr. Chairman,we are confronted today with problems which in their profoundness and complexityare without precedent in Sub-Saharan Africa. It did not prove possible to take advantage of the temporary recovery of copper prices and several good harvests to start dismantling  - 1A1 - AttachmentXVII Attachment 2 Page 3 of 6 structural rigidities. The Zambian Governmentwill now have to implement its difficult, far-reachingand, in some cases, unpopular reform measures in a global economic environmentwhich if anything has become less favourable. The structuraladjustmentprogramme is a good startingpoint for a promising development strategy for Zambia; neverthelessit would be wrong to raise unrealistic expectationsof a rapid and widespread recovery of the Zambian economy and, as a result, of income and employmentfor the large majority of the Zambian population. I should like now to mention a few points which have arisen from previous experiences of structuraladjustmentprogrammesin Zambia and other countries; partly they were touched by other speakers. Nevertheless I would like to underline some of these issues in order to demonstratethe importancewe attach to them: First - The decontrollingof prices for consumer goods (with the exception of maize meal) and the introduction a second window for foreign of exchange allocation are important steps towards reintroducing market-orientedmechanisms. But there will only be an efficient allocationof resources in the long run if other areas such as marketing and trade are liberalisedand if there is eventually more competition in all sectors of the economy. In this recpect  - 112 - AttachmentXVII Attachment 2 Page 4 of 6 would be helpful to get a clearer picture of the future role of cooperatives in the agriculturalsector. Second - In view of the shortageof jobs and income opportunitiesmore scope must be created for individualeconomic agents to enable them to react to newly introducedincentives. These include the highest possible degree of privatisationof the parastatal sector of the economy as well as dismantlingconstraintson informal employment opportunities,the developmentof the small-scale enterprise and small-scaletrade sectors. It was mentioned that a study on the parastatal sector is being carried out. But in some cases it is questionablewhether further investigationsare really necessary to prove that parastatals are less efficient than the private sector. And the addition to this : looking at the nature of these undertakingsa deep and costly parastatal involvement seems not to be justified. This applies especiallyto Contract Haulage Ltd, and the promotion of tourism. Third - The social equity of the structuraladjustmentprogramme is of crucial importanceto gain broad support among the public; a social dimension for the programme should not, however, be confused with preservingage-old privileges and special access rights to scarce resources;a cushioningof the temporary social costs of the structuraladjustmentprogramme - which is supported by all of us must, rather, take adequate account of the income  - 113 - AttachmentXVII Attachment 2 Page 5 of 6 distributionaspect with a view to the of sustainability stimulating growth processes;this requires, inter alia, direct or indirect income redistribution favour of the poorer sections in of the population and those living at or below the threshold of poverty. This is consideredone of the preconditionsfor helping to ensure that circular flows in the economy once stimulated, become self-sustaining. One of the tasks of the donor community should be to support the Zambian Government in developingand promoting mechanisms for micro-level development. This may mean strengtheningnational institutionsas well as increased community participation. The financial,organizationaland manpower demands placed on the state institutionslikely to have the main responsibilityfor implementing the structuraladjustmentprogramme, are high. Clearly, therefore, appropriateways and means must be sought to devolve responsibilities decentralizedlevels which have proved to to be more efficient in providing certain social services. Likewise, the local population should be asked to make financial contribution to the provision and maintenance of the respective services. These aspects will be of importancefor the implementation the of Social Action Programme. Neverthelessit will be necessary to  - 114 - Attachment XVII Attachment 2 Page 6 of 6 examine very carefullywhether the institutionsconcerned,as well as the local population,have at their disposal the capacities they require to meet these new tasks and demands as laid down in the Social Action Programme. The complexity of the adjustment strategypresented here by the Zambian Government demands for still closer cooperation and consultation among the donor community. We should take advantageof this CG meeting as a starting-point. I hope that there will be space for some side meetings, especially on the agriculturalsector and the TA programme. Furthermore, it is obvious that the structuraladjustmentprogramme can hardly be implemented successfullywithout adequate financing. I do not wish to go into the core question of whether the programme can be financed since this will be a subject for detailed discussion later. In many ways Zambia's structural adjustmentprogramme breaks new ground; it will expect from both bilateral and multilateraldonors an above-averagemeasure of flexibility and adaptability to the requirementsof the reform programme and to the actual developmentpriorities. Within our possibilities are prepared to we respond to these necessities. Thank you, Mr. Chairman I  - 115 - ANNEX XVII Attachment 4 Page 1 of 5 CONSULTATIVEGROUP MEETING FOR ZAMBIA Paris, April 9-11, 1990 Statement by Mr. B. Merghoub Head of the African DevelopmentBank Delegation Mr. Chairman, Honourable Ministers, DistinguishedDelegates, On behalf of the African DevelopmentBank Group I would like to express our sincere gratitude to the Governmentof Zambia and the World Bank for the invitationextended to us to participate in this Consultative Group (CG) Meeting for Zambia and also for the documents prepared for this meeting. we At this time of our intervention, would like to commend the Government of Zambia for the progress it has made with the Fund and the World Bank in the last few months which has led to the preparationand adoption of the Policy Framework Paper (PFP) for 1989-1993 and the StructuralAdjustment Programme. The macroeconomicand sector policies which are an integral part of the adjustmentprogramme are bold and far- reaching and should deserve all the support of the internationaldonor community. Strict adherence to them will go a long way in helping the economy to recover. What is important now is that with the agreement between the Government of Zambia and the donor community, the adoptionof the programme should pave the way for increased lending to Zambia.  - 116 - ANNEX XVII Attachment 4 Page 2 of 5 Already the implementation the measures announced in 1989 to of strengthen the economy appear to have had a favourableimpact on the macroeconomicvariables of the economy, even though the responseof the sectors, particularlythe priority ones such as agricultureand manufacturinghas been slow. This is understandableon account of the long response lag-time of production activities in these sectors and the urgent need to rehabilitatesupportingkey infrastructurein different sectors of the economy. In spite of the limited success in the macroeconomicarea for the whole of 1989, there seems to be, however, encouragingprogress regarding inflation,non-traditionalexports, and exchange rate, and adjustmentin the later part of 1989. To maintain and reinforce this progress the Government will need to monitor closely money supply and exchange rate to control budget expendituresand to step up investmentin priority areas. We are glad to hear that the Governmenthas in a number of cases taken additionalmeasures well beyond what was contemplatedunder the PFP. We are also impressed by the Government'sefforts to take necessary steps to ensure that the adjustmentprogramme does not exact a heavy toll on the most vulnerable groups in the society. The acceptance and successful implementation the adjustmentprogramme is partly of dependent in how the vulnerable groups become affected. In this regard we welcome the initiatives including the introductionof financial awards and coupons already undertakenby the Government. However, we would like to  - 117 - ANNEX XVII Attachment 4 Page 3 of 5 call on the Government to proceed quickly with the plan to conduct a comprehensivereview of the informal sector in terms of its scope, activities, credit needs and the form and type of support that can be further provided. We feel the internationaldonor community should give the necessary support and encouragementto the Governmentin this area. At this point, let me make a few specific comments on the Government's adjustmentprogramme. First, the issue of diversification. The need for intensifiedefforts to speed up the process of diversification of the economy away from copper to non-traditionalexports has bow become extremely urgent. This is more so given the prospects for copper that recent sectoral studies have revealed. Copper exports are not likely to rise above 1989 levels and are expected to decline during the current Plan period. A number of the country'smajor mines are expected to close by the year 2000, leading to a significantdrop in mineral exports. The minerals scenario is one of declining production and possibly lower prices. Given this scenario, the need for increased exports from the non-traditional sector cannot be over-emphasized. The Governmenthas a target of 10 percent per annum growth in non-traditionalexports during the Plan period. We hope that specific actions will be taken to ensure continuityof growth at this level. We are particularly looking forward to a comprehensive programme of investmentand diversificationin the agriculturalsector where Zambia has the greatest comparativeadvantage and the greatest potential.  - 118 - ANNEX XVII Attachment 4 Page 4 of 5 Although the balance of payments improved somewhat in 1989, the prospects for 1990 seems to be unfavorablemainly due to the expected decline in copper prices and stagnationin production,and the debt servicing situation. The country's external debt looms very high in this respect. It will make a heavy claim on the country's limited foreign exchange resources for the foreseeable future. A new strategy apart from reschedulingand partial relief measures to deal with the arrears issue and the whole debt problem is indeed needed. We hope that the Governmentand the donor communitywill intensify their efforts to find an appropriate solution to the problem, thereby allowing the economy to resume sound growth. Lastly, the programme envisages increasinggross investmentfrom the present 13-14 percent of GDP to 27 percent by the end of the Plan period as an essential component of the adjustmentprogramme in order to replenish the country's capital stock and to enable the economy to attain the growth rates projected for the Plan. A substantialportion of this increase is expected to come from the private sector,which should be investing about 18 percent of GDP by the end of the Plan period, with government investing another 9 percent. To achieve these ambitious targets a comprehensiveplan of policy action is needed. The Plan should outline specific measures to promote private local and foreign investmenton the  - 119 - ANNEX XVII Attachment 4 Page 5 of 5 same footings as parastatals,i.e. regarding licensing,taxes, finance and foreign exchange allocation. We see action in this area as a major factor in streamliningand boosting productivityand growth in the economy and a means to promote employmentat this difficulttime of far-reachingeconomic restructuring. In conclusion,the adjustmentprogramme adopted by the Government of Zambia in June 1989 is a bold one whose successful implementationand sustainability will depend greatly on the full commitmentof the Governmentand the entire community of Zambia on the one hand to pursue the policies, programmes and objectivesand on the strong willingness on the internationaldonor communityon the other to provide resources,especiallynew capital flows, includinggrants or highly concessionalresources and debt relief to finance all of its debt service and arrears. We are aware of the enormous nature of the task facing the Government. On our part, we are in full support of the programme and we join the rest of the donor community in the same resolutionto work together closely to find a lasting solutionto the problem of the debt service that will permit resumptionof reasonablegrowth on a solid basis. Thank you.